Thermal power projects retrofitting pollution control systems on commissioned units will be allowed to recover their costs in parts from buyers during the tenure of power purchase agreements, Central Electricity Regulatory Commission (CERC) has suggested in a staff paper.

The Commission decided to float a staff paper on the issue of compensation mechanism and tariff implications. It refers to those thermal projects where the PPA does not have explicit provisions for compensation during their operation period.

The CERC has suggested that 90% of the cost of installation can be recovered over the life of the emission control equipment, which is also estimated at 25 years; the rest 10% could be salvage value.

After a power purchase agreement expires, the power producer will have to tie up with another procurer or sell power in the market to recover its remaining costs.

If a project is already operational, the power producer can start billing the utility – its power procurer, once the pollution control equipment is commissioned. The reimbursement would be in proportion to the power generation capacity tied up by the generator.

A Supreme Court guideline and a Central Pollution Control Board order have stipulated that all coal-fired power generating units needs to reduce harmful sulfurous gas emissions by December 2022 through retrofitting necessary equipment. Industry players estimate the additional cost to be a few hundred crores for every generating unit, which could raise power generation costs.

The CERC staff paper has attempted to formulate a generic mechanism for compensating the power producer since the cost of retrofits can be passed on to consumers as it is considered a ‘Change in Law’ event.

Monthly bills raised by generators can include investment, regular operation, and maintenance costs of the retrofit. It can consist of loss of revenue due to shutdown and would be similar to any bill provided in the power purchase agreements.

If retrofits are installed after a power project is commissioned, power units could face difficulty in recovering costs. The useful life of a project and retrofit is assumed at 25 years. To match them, if the retrofits are installed later, the power producer has the option of extending the life of the project by 10-15 years through renovation and modernization.

It is proposed that additional operation and maintenance costs of these retrofits for the first year may be allowed at the rate of 2% of capital installation cost. For subsequent years, it could be 3.5%.

The staff paper has attempted to restore the generating company to the same economic position, which was available to it before the installation of such pollution control systems. As such, an increase in quoted tariff due to additional auxiliary energy consumption should not form part of the supplementary capacity and energy charges.

Power units under construction will be allowed to include operation and maintenance costs, working capital finance costs, and impact on quoted capacity and energy charges due to additional energy consumption needs of these retrofits.

Background

In February 2019, the Ministry of Power proposed a ₹835 billion ($11.70 billion) plan to meet the cost of development of Flue Gas Desulfurization (FGD) to improve air quality and to conform to new norms notified by the Ministry of Environment Forest and Climate Change (MoEF & CC) for power plants.

FGD is a process to remove sulfur dioxide from exhaust flue gases of fossil-fuel power plants, and the emissions of other sulfur oxide emitting processes such as incineration of waste material.

Later in January 2020, the Prime Minister’s office also recommended waiving the Goods and Services Tax (GST) Compensation Cess (earlier called the Clean Energy Cess, which was India’s version of carbon tax) on coal to reduce the financial strain on distribution companies, besides helping the thermal power projects install FGD to curb pollution.

Projects which have to invest in the FGD facility at their sites would have to sell power at a higher tariff to make up for the implementation costs. Even with financing, it is said that the power tariff would increase by ₹0.30 – 0.35 (~$0.004 – 0.005)/kWh. This would invariably burden the power distribution companies that already owe power generators ₹1.19 trillion in overdue payments at the end of June 2020.

This move is positive for the Indian coal industry, but on the flip side, it could make coal power more competitive with solar and wind energy.