Lighting up with coal

The integrated Coal, Power, and Renewable Sector presents quite a few “feel good” upsides. The record growth in coal production from Coal India Ltd (CIL), the transition of the Coal scenario from acute shortage to surplus, the comfortable coal inventory build up at power stations, the 175 GW Solar power program and the push towards replacing traditional bulbs and white tube lights by LED and energy efficient products reflect a clear focus in managing energy from both supply and demand sides in an integrated manner. The government deserves compliments for that.

Nevertheless certain observations are note worthy.

1. The reversal in the Coal situation from shortage to surplus has happened despite the captive blocks producing far less than projected, and CIL achieving only 75 percent of its targeted incremental production of 56 mt in 2015-16.

2. The PLF (Plant Load Factor)of the existing power plants falling to a new low of 62 percent in 2015-16 from its peak level of 75 percent attained few years ago.

3. The spot merchant power tariff becoming competitive or in quite a few cases lower than PPA regulated tariff, signifying lack of power demand, despite the per capita power consumption in the country being much lower than world average or even of China.

4. The renewable energy, particularly Solar power posing a threat of displacing thermal power during non-peak daytime hours.

A closer perusal of these issues, holistically, tends to suggest that the multi-pronged plan to achieve self-sufficiency in power in the shortest possible time, misses out on factoring a critical parameter, namely affordability of power.

 The goal being pursued is not aligned to generating power efficiently at the least cost. The price elasticity of power demand is well established. Hence, importance of making power available at lower cost/tariff assumes significance.

Going further, of all the sources of power, the least cost option is to allow the thermal power plants (excluding those that need to be phased out due to higher emissions) to restore PLF to 75 percent. The resultant generation of 20 percent more power from such plants will entail only the variable cost of mainly fuel.

 At a specific coal consumption of around 0.65 kg/kwh and landed cost of coal at Rs.2500 per tonne, the variable cost works out to Rs.1.75/kwh. The coal-based energy generation in 2015-16 was about 860 bn units at 62 percent PLF. Moving the PLF to 75 percent will mean additional generation of 170 bn units at Rs.1.75/kwh.

Allowing Solar power or other renewable sources priced at not less that Rs.4.25/kwh to step in for displacing thermal power leading to fall in PLF will place a burden of Rs.2.50/kwh (4.25 -1.75). For the 170 bn units of additionally possible thermal generation foregone in this process the cost burden would work out to a staggering Rs.42500 crores/annum.

In other words, prioritising thermal power generation from existing capacity to the maximum over solar and renewables will save Rs.42500 crores besides pushing up the demand for coal by 120 mt/annum. For a nation endowed with plenty of coal and with emissions well below the share of global emission admissible pro rata population, not adopting such approach is hugely sub-optimal. Let us also not forget the additional contribution of Rs.4800 crores that coal sector will make towards clean environment cess if the suggested approach is pursued.