In a first, renewables surpass conventional energy sources in capacity addition in FY18

For the first time in the country, the renewable energy sector has added more capacity than the conventional power — thermal, gas and nuclear — in 2017-18.

The renewable energy sector which includes solar, wind and bio-fuel, has added 11,788 MW of capacity to the grid in FY18. Though the renewable energy capacity addition fell short of its target (14,510 MW) for the fiscal, it exceeded the capacity added by conventional segment which stood at 9,505 MW, according to the data provided by Union Ministry of New and Renewable Energy.

This development is more a reflection of the challenges faced by the conventional energy sector which registered a steep decline of 33 per cent when compared to 14,209 MW capacity addition in FY17 rather than any steep increase in renewable addition which actually grew by just 4 per cent.

Faced with multiple challenges, thermal sector’s capacity addition came down to 8,710 MW in FY18 from 11,550 MW in the previous year. While falling tariffs of renewable power is making coal-fired power units less attractive, the thermal power sector has also been plagued by overcapacity, weak demand and lack of visibility for tying up long-term power purchase agreements (PPAs).

PPA tie-up

Plant load factor (PLF) of independent power producers (IPPs) hinges on PPA tie-up with distribution utilities. Of the 82 GW capacity of independent power projects (commissioned and under construction), only 29 GW have long-term PPA tie-ups that too for less than 50 per cent capacity and are unlikely to see new long-term PPAs, according to a recent report of India Ratings.

M Manoharan, Director-Finance, TANGEDCO, says that coal-related issues are affecting the thermal sector, while globally there is growing preference for renewables due to pressure to reduce emission levels. Analysts indicate that main issues of coal are in the logistics side. Also, the two-part tariff (fixed and variable) discourages distribution utilities (Discoms) to sign any additional PPAs.

Recent trends signal that Discoms prefer to buy short-term power on exchanges rather than entering into a long-term PPAs in order not to commit on fixed costs.

“Dependence on short-term exchange tariffs leave the untied thermal projects to the vagaries of short-term tariffs. Many of these plants are shut down when tariffs reach unsustainable low levels. There is also a problem in scheduling and forecasting due to short-term nature of contracts,” points out Venkataraman Rajaraman, Senior Director – Infrastructure & Projects Finance, India Ratings.

Meanwhile, the government’s proposed plan to implement Flue gas desulphurisation (FGD) technology in order to cut emissions in thermal plants by 2020 is likely to have a negative impact. For the stressed thermal power sector, this implies a capex ranging between ₹5 million and ₹7.5 million per megawatt, as per industry estimates. Besides the capex involved, the regulators also needed to draw up a plan on how the costs would be calculated for tariff setting and the downtime that plants would require to fit the technology.

But all is not lost for the thermal sector.“While increasing renewable mix poses a threat on grid stability, thermal can act as base load and thermal plants with no long-term tie-up (both coal and gas based) can get some premium to maintain base load. But the same is some time away,” points out Rajaraman.

Maintain lead

Given the government’s strong focus on green energy, continuing stress in the thermal sector and recent trends in power purchases, renewable energy sector is likely to maintain a lead in terms of new capacity addition over the thermal sector in the next few years.