Context

As part of the Union Budget address for 2020-21, the Finance Minister, Nirmala Sitharaman, said that the shutting down of old coal power plants, which are major contributors to emissions, will aid the achievement of India’s Nationally Determined Contributions.

Advantages of shutting down old coal power plants

• The availability of under-utilized newer and presumably more efficient coal-based capacity means that shutting down older inefficient plants would lead to improved efficiencies, reduced coal usage, and hence, cost savings.
• It would be uneconomical for old plants to install pollution control equipment required to meet the emission standards announced by the Environment Ministry, and hence it would be better to retire them.

Why the decision needs finer scrutiny?

• Some old plants are cost-effective: There are also several old plants, which generate at lower costs, such as plants at Rihand, Singrauli, and Vidhyanchal (Madhya Pradesh).
• Locational advantage: This may be due to locational advantage rather than efficiency, as older plants are likely to be located closer to the coal source, reducing coal transport costs.
• Not cost-effective: Savings in generation cost from shutting down plants older than 25 years would be less than ₹5,000 crore annually, which is just 2% of the total power generation cost.
• Not effective in reducing coal consumption: Savings in coal consumption by replacing generation from plants older than 25 years with newer coal plants are also likely to be only in the 1%-2% range.
• Economical even after installing pollution control equipment: There are some old plants that may continue to be economically viable even if they install pollution control equipment as their current fixed costs are very low.

Important roles played by old thermal power plants

• A significant part of power supply: Plants older than 25 years makeup around 20% of the total installed thermal capacity in the country and play a significant role in the country’s power supply.
• Supporting renewable: To support the growing intermittent renewable generation in the sector, there is an increasing need for capacity that can provide flexibility, balancing, and ancillary services.
• Old thermal capacity, with lower fixed costs, is a prime candidate to play this role until other technologies (such as storage) can replace them at scale.
• Political economy risk: There is also a political economy risk, as aggressive early retirement of coal-based capacity, without detailed analyses, could result in real or perceived electricity shortage in some States, leading to calls for investments in coal-based base-load capacity by State-owned entities.

Way forward

• Nuanced analysis needed: Instead of using age as the only criteria, a more disaggregated and nuanced analysis needs to be used.
• Constraint related to renewable and increasing demand: We also need to take into account aspects such as intermittency of renewables, growing demand, and the need to meet emission norms, to make retirement-related decisions.

Conclusion

It may be prudent to let old capacity fade away in due course while focusing on such detailed analysis and weeding out the needless capacity in the pipeline, to derive long-term economic and environmental benefits.

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