Captive generation: The cost-effective alternative
Captive power generation is the backbone of India's large industry. By definition, companies/ industries which consume 1 MW or more can setup generation facilities for own consumption. Majority of the large enterprises in the country - steel, chemical, cement, textile, auto, aluminium - have a captive generation to meet their consumption requirements. The key reasons to set up a captive plant are a) the generated power is stable, reliable and continuous b) cheaper in comparison to the grid-supplied power.
Globally, India is the third-largest electricity producer in the world with an installed capacity of 362 GW. Thermal capacity with coal-fired power still continues to be the mainstay. Over 200 GW comes from coal-based power plants.
Power in India is a concurrent subject and any policy level review, amendments and implementations invite resistance in the high order.
At the beginning of the '90s decade is when the country allowed participation of private entries in power generation to an otherwise government dominant segment. State Electricity boards conventionally took care of generation, transmission and distribution. Following the allowance of the private companies in the generation, the captive power policy also witnessed major Amendments. In 1995, the government allowed the captive power generators to sell the surplus power on to the grid.
The amendment came in as a measure to address an impending crisis. According to a government order issued in this regard states, "At the end of 1996-97, the energy shortage is visualised at 15 per cent and peaking shortage at 30 per cent." To meet this widening demand gap, the quicker solution was to allow private participants to set up captive power plants.
The notification said, "There is a need, therefore, to open an alternative route other than Private Generating Company, where the industries themselves will be interested in meeting their own power demand by pooling resources together. Captive Power Plants offer such an alternative. The captive power plants of industries may be allowed to sell their surplus power, if any, to the Grid, on a remunerative tariff, as per mutually agreed terms. Setting up of captive power plants would quickly add to the generating capacity in the country."
The two and half decade journey of the captive generators has been an incredible one. As on March 31, 2019, total captive generated power accounts for 58,000 MW, which stood at 54,938 MW the same period in 2018.
Majority of the captive power plant while running on coal as a fuel, there are plants which run on natural gas, diesel generators, solar energy hydropower, and wind power.
Captive power generation also has co-generation plants as well. The fuel for this segment is mostly either biomass or heat to energy technology.
So far, the story is perfect with a high growth rate, considering the current capacity of 58000 MW.
Is all well with the sector? An emphatic no is the answer. The sector, like any other business vertical, is struggling to overcome many impediments. But stakeholders believe that there is a silver lining in this segment.
Says MS Unnikrishnan, Managing Director and & CEO, Thermax,"In fact, cement is an industry, despite the economic slowdown, there are companies that are investing in cement plants and captive power plants alike."
But he did agree to the point that there is volatility in captive capacity addition. He added, "In the peak times, there were 2,500 to 3,000 MW ordering out from captive and co-generation put together. Now it must have come down to 700 MW. An indication of the ups and down seen in this segment. So the sector will continue to witness such oscillations depending upon how the capacities are being created, the financial position, banks ability to fund etc. But it is not a story that is getting over."
In an interview with our sister publication Infrastructure Today, Kameswara Rao, Leader, Energy, Utilities & Mining, PwC India, said, " There is undoubtedly a flattening in captive capacity addition. Indeed, the grid supply conditions have generally improved in the last few years. But that is not an indication of captive going off completely. Some small scale industries have reduced their dependency on captive/backup power sources and migrated totally on the grid. But not that significant in size. However, for large scale industry, the grid doesn't guarantee of supply and still are captive dependent. Though we are in a better of condition, ensuring 24/7 supply, for the industry clusters" like the textile, auto clusters " the supply still not reliable enough. That is why captive still continues to add capacity. "Though the industry pays much more, they don't get the quality of supply. The grid power cost is on the higher side. So if as an industry person with higher consumption, it is wise to put up a captive power plant as the power generated would be 30-40 per cent cheaper than the grid supply."
The economic growth of a country depends on the pace at which its energy segment grows. If an economy registers a growth rate of say 5 per cent, then the energy segment of the country should grow at 10 per cent to match the surge in demand. It also is indicative of the fact that, if there is a slowdown in the economy, power will be one of the first sectors to take the brunt.
The major impediment today is the economic slowdown. But, it is a temporary affair with pressure on investments. It is now expected that it will take another few quarters (two to three quarters), and in some cases as long 6 quarters or 18 months for a rebound.
Secondly, the government announcement of phasing out of thermal capacities. With a country whose dependency is more than 70 per cent on thermal power, for sure to take significant time for phasing out. The infirmity of renewable sources will continue to pose challenges when it comes to industrial supplies.
Thirdly, per capita consumption of India is 1181 kWh which is way lower than the global average. It offers tremendous opportunities for all stakeholders. However, for a country like India, which has a high dependency on imports for its energy needs, hits on many impediments.
India and China are the two economies, according to the world economist, the global growth drivers. Having said that China, with almost equivalent population size is much ahead in electricity generation. China at the current levels produces four times power than India; for India to reach that levels of electricity generation would require higher investments. This, the sector experts view as a key challenge as the county does not have the financial ability to fund such large generation capacities. That also requires having a dynamic and adequate infrastructure to support such big generation capabilities.
So, as a country, India has to look at private participation, beyond the generation segment to add capacity, improve efficiency and for a better quality of power. Now the question is, will India offers a captive market to stakeholders to sustain?. Unnikrishnan said,"I am also selling captive power boilers in South East Asia with development almost similar to India. We are getting orders from Indonesia, Philippines, Thailand. Africa is another market which is catching up in captive power, and even South America is prospective. So it is not only India but expanding geographies offers the right market. Domestic alone may not be sustainable enough, but a combination of domestic and international markets."
In lies with the fully developed infrastructure prevailing in the developed world, when India reaches to that level, the captive power segment will go down. The pertaining question one has in mind is that - does India have a fully developed power infrastructure? India has achieved the milestone of one nation, one grid couple of years back. It also has adopted technology that allows multiple source generators to pump in electricity from different points. These improvements, both in transmission and distribution, have helped the country's electricity segment to be more interactive.
But, India, in comparison to its global peers, is far behind in grid infrastructure. The stakeholders' opinions that India's power infrastructure is developed only 15 to 20 per cent. 80 per cent development is remaining, and that would take at least 3 to 4 decades minimum.
As Unnikrishnan signed off, he said, "Captive power industry/co generation industry in India will continue to add capacity. But the relevance may come down 20 years or 25 years down the lines. We are not there yet."
Captive power is a story that is continuing to contribute significantly to the capacity addition of the country.
- LIZA V