Auctions to turn the spotlight on Coal vs Renewables

In a week from today, the country will know how many bids have been received for the 41 coal mines put under the hammer. The results will be interesting, because a number of studies have shown that investing in a coal mine today for long-term production of the fuel for electricity generation defies logic.

Ever since ReNew Power won 400 MW in an auction held in May to sell ‘round-the-clock’ power, offering to sell electricity at a shockingly low price of ₹2.90 per kWhr for the first year (₹3.56, if averaged over the 25-year agreement period), nobody mentions the word ‘coal’ without a question mark next to it.

And now, more analyses have emerged, only to highlight the question mark.

For instance, in June, ratings and research company ICRA said that while the demand for domestic coal would continue to grow, it would do so at a slow pace and most of the incremental growth in demand “is likely to be grabbed by Coal India Ltd,” the well-entrenched, state-owned incumbent, “leaving limited room in the domestic market for an accelerated growth in commercial coal mining by private miners.” ICRA pored over the numbers and concluded that it would be tough to compete with CIL, given the public sector miner’s scale-derived, low-cost profile.

Then, in July, another research company called Centre for Research on Energy and Clean Air (CREA) crunched some more numbers and wrote on the banner that because Coal India is also expanding its capacity, there would be a “massive oversupply of coal” of the magnitude of about 100-200 million tonnes, even if the production from other state government-owned coal companies and private captive coal mines remained the same — not an encouraging message for those mulling bidding for new coal mines.

And then, India’s premier energy think-tank, The Energy and Resources Institute (TERI), peered into the thermal power sector and stated tellingly that “additional investment in coal-fired power beyond the current pipeline would be neither necessary from a system adequacy point of view nor financially justified (emphasis added) given the rapid cost declines in renewables plus storage and broader grid integration strategies.” Note the reference to “storage” in TERI’s statement. The Institute is saying that the coal miners would have to supply to coal-fired power projects whose viability itself is drowning in the floods of renewables — as wind and solar projects, combined with storage, can today supply steady power cheaper than coal plants.

Who needs storage?

And then came another analysis of the not-for-profit, energy NGO, Prayas Energy, which threw up a sit-up-and-take-notice kind of message: you don’t even need storage; a combination of wind and solar can comfortably take on coal power.

For the analysis, researchers at Prayas Energy, Ashwin Gambhir, Shantanu Dixit and Ann Josey, took ReNew Power 400 MW winning bid for ‘round-the-clock’ supply of power. They found out that with a combination of wind and solar, built to right capacities, the company could profitably supply steady power at the bid-clinching levelised tariff of ₹3.59 a kWhr.

The RTC auction of SECI requires the winning bidder to commit to supplying a certain minimum level of power all through the year; any failure would attract stiff penalties. Prayas Energy worked backwards and discovered that “one combination of 1,500 MW of wind power and 850 MW of solar power meets the above requirements”, if the projects came up in Maharashtra. You can throw the costly storage out of the window.

This combination, Prayas says, will guarantee the minimum committed supply of round-the-clock power through the year, because one or the other of solar and wind would be producing enough. Obviously, when both plants are generating electricity, there would be a substantial surplus. What to do with the surplus? Sell it in the market.

Prayas punched some more keys in the calculator and found out that the project would only need to sell the surplus power in the market for an average price of ₹1.81 a kWhr to stay viable. This price seems easy to get because the market prices have consistently been much higher. For instance, last month, in the ‘real time market’ in the power exchange IEX, the average monthly ‘market clearing’ price was ₹2.49 a kWhr.

Market reforms will help

Recent developments in the power market are veritably supportive of renewables. Until June, a power generator could only estimate its surplus for the next day (for 15-minute periods) and put in sell bids on the exchange. But in June, the two exchanges of the country, IEX and PXIL, introduced ‘real time market’, or RTM. Power sellers and buyers can bid for making or taking delivery after one hour.

So, if a wind farm experiences a sudden gush of wind, it now has the RTM facility to sell the surplus energy.

Well, even today, a wind plant is allowed to make intra-day revisions in its committed schedule 16 times (solar, eight times), but the RTM is another good alternative.

Furthermore, the Central Electricity Regulatory Commission is keen on bringing in the ‘market-based economic dispatch’ of electricity (MBED). While the full contours of MBED are yet to evolve, the idea is to push all electricity transactions, including (eventually) bilateral contracts, over to the exchanges. Basically, generators compete on their variable cost of power — the cheaper power gets bought. When renewables too come under MBED, wind and solar generators, whose variable cost is next to nothing, will easily out-bid coal.

In sum, all the developments in the energy markets — including those in the finance sector which is increasingly refusing to fund fossil fuel projects — seem to be elbowing out coal to the margins.

It is against this backdrop that the first true privatisation of the coal industry is happening. The bidders in the auctions that conclude on August 18 will have to brave several odds. That is why the results will be interesting.

COMMENT NOW