Thermal plants fire up coal as capacity addition lags, private sector interest wanes

In contrast, solar capacity has more than doubled to 81 GW whereas average capacity utilisation has decreased slightly from 17 per cent to 16 per cent. Wind capacity also grew by 22 per cent to 46 GW, while capacity utilisation grew slightly from 20 per cent to 21 per cent.

The mismatch between growth in generation and capacity addition comes at a time when the Ministry of Power has been increasingly relying on thermal plants to meet demand in peak hours, like late evenings, when renewable sources like solar do not generate electricity. For instance, over the last few weeks, it instructed fifteen imported coal-fired and all gas-based thermal plants to be operational during the summer months, with temperatures hitting record highs.

Thermal capacity targets not met

Over the last five year, though, against the government’s own targets, thermal capacity addition has seen an average annual shortfall of 54 per cent. Notably, the private sector, which has a better track record at setting up new projects within timelines, accounted for just 7 per cent of all new capacity added in the same period. With healthy growth in power demand and minimal storage infrastructure for renewable energy, India is increasingly relying on thermal power to meet peak demand in summer months.

Despite significant renewable energy capacity added over the last five financial years, the share of coal-fired power generation increased to 75 per cent of total power generated from all sources in FY24 from 71 per cent in FY20. While the government aims to add another 80 GW thermal capacity over the next eight years, experts point to the possibility of the slow pace of capacity addition and an underwhelming response from the private sector leading to more shortfalls, which in turn can stress existing thermal capacity, especially as utility-scale adoption of energy storage systems is expected to take some more years.

RK Singh, the Union power minister, in November 2023, told industry stakeholders that the government plans to add 80 GW thermal power capacity by FY32. “Power demand of the country has increased at an unprecedented rate due to rapid growth of the economy. India needs 24×7 availability of power for its economic growth; and we are not going to compromise on availability of power for our growth. This power cannot be achieved by renewable energy sources alone. Since nuclear capacity cannot be added at a rapid pace, we have to add coal-based thermal capacity for meeting our energy needs,” Singh said at a stakeholder interaction in November.

Still, going by the government’s own targets for thermal capacity addition, the annual shortfall has averaged 54 per cent over the latest five financial years. According to data with the Central Electricity Authority (CEA), nearly 24 GW of thermal capacity was added against a target of 50 GW. In FY24, 6.2 GW was added against a target of 14.7 GW, a shortfall of 58 per cent. The most capacity added in the last five years was in FY20, which was 6.8 GW with a shortfall of 34 per cent.

Private sector takes a backseat

The contribution of the private sector over the last five years was just 1.7 GW, or 7 per cent of the total thermal capacity added. In FY21 and FY23, the private sector added zero thermal capacity. The absence of the private sector is also apparent in capacity that is currently under-construction– of the total 29.4 GW distributed across 22 projects, private capacity under-construction is just 1.6 GW held by one project owned by a subsidiary of Adani Power Limited. A total of 26 private projects with a capacity of almost 24 GW are currently either on hold or not likely to be commissioned.

R Shankar Raman, CFO of Larsen & Toubro Limited, India’s largest construction company that also builds power plants, in a recent earnings call said that “all the power investment has ceased because all the power producers, the private capital who backed it, are all in NCLT in different forms”. In addition to insolvency proceedings plaguing the private sector, the estimated capital cost for setting up of new coal-fired thermal capacity has also gone up to Rs 8.34 crore per MW. For contrast, the cost for setting up 1 MW of solar power can be half as much.

“The cost of putting up a power plant has definitely gone up because we have seen a lot of international banks walk away from financing coal-fired projects. When you borrow from international banks, the interest rate is much lower but when you borrow from local institutions, then the interest rate can go up to double digits. That means that you’re really not able to finance your project at the cheaper level. But countries like China continue to add huge capacities. In the last couple of years, China has added almost 218 GW coal-fired capacities, which is half of India’s current total power generation,” Deepak Kannan, Global Head of Coal Pricing at S&P Global Commodity Insights, told The Indian Express.

“I don’t blame anybody for sticking to coal because that is the only way out from a policy perspective. For the industries, you still have to rely on coal for 24×7 power supply, especially in developing economies. It makes more sense for the government to promote solar power in villages where they don’t run motors throughout the day or in homes where you run a few appliances but require less battery capacities,” Kannan added.

Leading power cos send mixed signals

Leading private companies in the power sector have thus far sent mixed signals. In addition to the under-construction capacity of 1.6 GW in Singrauli, Madhya Pradesh, Adani Power also plans to add 1.6 GW more in Raigarh, Chhattisgarh. Tata Power Company Limited, on the other hand, does not plan any greenfield investment in thermal capacity in the next 2 to 3 years, executives confirmed in the QY4FY24 earnings call.

“Well, as you know, we have seen the FDRE (firm and dispatchable renewable energy) projects are going to be the new future. And the number of bids that are expected are very large, where you get a certainty of getting renewable power. There is huge pressure. It is not only about supply, but there is a huge pressure from the customer side also that they want to transition to clean energy, whether it is industry or commercial or even residential consumer,” Praveer Sinha, CEO of Tata Power, said in the earnings call on May 8.

The future of FDRE, which employs energy storage systems to consistently supply renewable power to consumers, is yet to be settled with industry leaders sharing varied views on the economic feasibility of battery energy storage systems (BESS). Many see utility-scale adoption of BESS only from 2030 onwards.

“The sharp growth in electricity demand is necessitating a rethink from the Government on thermal capacity addition, with push for investments in new thermal power projects including by the private sector, with the target of adding 80 GW of new thermal power capacity by 2032 to meet the growing energy needs. Given the long gestation period, it is imperative for the power generation companies to initiate work on these projects over the next 18 to 24 months to meet the 2032 timeline,” ICRA noted in a power sector update late last year.

EDOT: Thermal focus to meet peak hour demand

The growth in generation and capacity addition mismatch comes at a time when the Power Ministry has been increasingly relying on thermal plants to meet demand in peak hours when renewable sources like solar do not generate electricity. Over the last few weeks, it instructed 15 imported coal-fired and all gas-based thermal plants to be operational during the summer months, with temperatures hitting record highs.