Thermal Sector: Performance & Constraints in 2018

“Thermal industry is on the mend, as stressed IPPs are under various stages of debt reduction through resolution plans or by way of bankruptcy proceedings.” - Ankur Agarwal, Divya Charen

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Plant load factor (PLF) for thermal plants increased to 60.5 per cent in 1HFY19 compared to 59.0 per cent in 1HFY18. The uptick in thermal PLF is significant as average PLF has been falling continuously since FY2010. The trend reversal can be attributed to muted thermal capacity addition. It is of note that PLF of IPP has dipped a little and might be attributed to coal supply constraints (because of relative preference in coal supply to central or state sector plants) and to constrained operations of debt laden IPPs.

On the back of increasing demand and muted thermal capacity addition, PLF of thermal plants is likely to increase. If PLF increases sustains, confidence of investors and lenders will improve.

Source: Central Electricity Authority (CEA)
Source: Central Electricity Authority (CEA)

Critical coal supply pressures are affecting the thermal projects, especially the independent power producers (IPPs) whose debt servicing critically depends on their operation. The coal supply situation has been constrained for over a year now. While efforts are in way to improve logistics and mining operation, the criticality of coal inventory is evident in that the coal stock covers only six days of operation as of 31 October 2018. Non-pithead plants are significantly affected because of the coal supply issues.

Since 2014, there has been little demand for long-term power purchase agreements (PPA) from coal based IPPs and that trend has continued in 2018. Out of analysed 82GW of coal based IPPs, about 30 GW of coal based IPPs don’t have long-term PPA for above 50 per cent of respective plant capacity. Government’s push to sign medium-term PPA for 2500MW is very welcome. Apartment

Gas plants continue to suffer because of high fuel prices and lack of demand from these plants.

Technology – Competition for Thermal Sector

Supercritical plants will dominate the capacity addition. While generators may explore ultra-supercritical thermal plants, thermal sector faces the headwinds of nimble renewable energy additions. Technology surprises in solar and battery could be a significant factor concerning thermal sector, but such factors will play out over two or three decades. Gas plants may be required for balancing the power supply with load in grid, but such requirement is still way ahead.

Imposing of enhanced emission norms is weighing on thermal sector as the investment for compliance requires investment of about INR6-10 million/MW. Raising this investment is likely to be tough for thermal plants given the current state of lending markets.

Source: Central Electricity Authority (CEA)

Outlook for Thermal Sector

Thermal industry is on the mend, as stressed IPPs are under various stages of debt reduction through resolution plans or by way of bankruptcy proceedings. Reduction in debt among power projects is likely to lead to healthy competition among IPPs.

Thermal plants will continue to dominate the energy supply mix for at least another decade and they are the primary generators servicing the base load. Existing thermal plants are likely to enjoy increase in demand and thus profitability from the current levels. However, the balance between conventional and renewable energy is likely to be under pressure, in favour of renewable energy, albeit very gradually. Quantum and timeline of capacity additions in thermal sector have to be planned diligently to avoid significant undersupply or oversupply.

Effort to electrify transportation can also contribute to robust demand increase. Though efforts to electrifying transport has started recently, there could be significant developments on the back of consistent policies on charging infrastructure and consumer-oriented incentives for buying electric vehicles.