In the last two and half years, Indian power sector has undergone a visible transformation across its complex value chain . Piyush Goyal, the Minister of State with independent charge for Power, Coal and New and Renewable Energy has established a rejuvenation framework for the ailing state distribution companies (discoms) through the UDAY scheme. There has been an increased thrust on renewable energy with India aspiring to be a global leader in solar power over the next few years.

The changes have been a combination of structural ones (which will have a long term impact) and sharp interventions solving immediate problems. The structural changes are largely in the areas of conventional energy sources, transmission and distribution, while the focused changes were undertaken mainly for renewable and power consumption devices. With the supply and the consumption side more or less stable, the other area of the value chain - conventional energy generation - seems to be the next up for a makeover.

Thermal power, the largest conventional source of power in India, has been a sector under tremendous stress. About 70 per cent of all installed power generation capacity in India is thermal, 85 per cent of which is coal fired. These coal based plants are owned by the central government (approximately 25 per cent of the installed base), various state governments (approximately 35 per cent of the installed base) as well as by private players (approximately 40 per cent of the installed base). The business dynamics of these three ownership categories vary widely.

Central government ownership of thermal power is through its power sector central public sector enterprises (CPSEs). National Thermal Power Corporation (NTPC), among the best managed CPSEs in the sector, has been expanding its installed base and running at plant load factor (PLF) of around 77 per cent over the last year. It also manages its operations efficiently, with the plant availability factor around 85 per cent in the trailing 12 months. NTPC has captive power buyers with a small number of large plants driving economies of scale.

State government plants are an altogether different story. Before 2003, when the entire power sector value chain was bundled together inside each state, the state power companies set up power plants for their own requirements. States never had the best expertise in running these plants and the quality of operations was sub-standard routinely. Plant sizes were never optimised - there are several state plants under 300 Megawatt (MW) generation capacity across India. As a contrast, the Haryana government runs a 55-MW plant in Faridabad, while the Adani group constructed a 4000 MW+ plant in Mundra (Gujarat) and NTPC has a 3000 MW plant at Sipat (Chhattisgarh).

After the 2003 Electricity Act allowed power companies to be unbundled, states started buying their power from third parties, but most continued to operate their own plants. In many cases, state generation companies (gencos) set up plants for political patronage reasons, blessing key constituencies with white elephants, which would win elections but then languish over time eating into precious financial resources. Many of these plants had no coal availability and they were situated in locations where transporting coal itself was a challenge. In several cases, there was no water availability to operate these plants. Some states like Rajasthan have started shedding these liabilities, but the stress on the state plants is real. The PLFs in this sector have been in 50s for a long time. The state genco thermal plant are the classic relics of India’s socialist economy - sub-scale, sub-standard, poorly designed, poorly operated power plants mostly for political gains, creating long term unsustainable financial liabilities.

This is where a new plan, which Goyal is working on, comes into play. Last week, he told Lok Sabha that his ministry is working on a plan to phase out all the thermal power plants, which are more than 25 years old. About 190 of the 400 odd thermal power plants are more than 25 years old, representing a combined power generation capacity of 55,000 MW or 55 Gigawatts (GW). These old plants tend to consume more coal, operate less efficiently when converting heat to electricity, and require frequent and costly maintenance. These plants are also more polluting in nature, having been set up as per specifications available in the 1980s. This announcement opens up a huge opportunity for various stakeholders in the thermal power sector over the next five to 10 years.

The state governments now have a chance to clean up their books stressed on account of their power sector operations. The ideal option is to sign new power purchase agreements (PPAs) with third parties with a source profile mixing renewables with thermal sources. States can also sell their old plants to NTPC, which can then modernise these units or replace them over time with more efficient plants. At the minimum, states can change coal linkages to their plants in a way that more efficient plants get more coal and operate at higher PLFs compared to the inefficient ones. This flexibility of managing coal linkages at a state level was already extended by Goyal’s ministry to state governments in early 2016.

The central government can ensure that the plant consolidation happens in the favour of gas fired plants, by ensuring gas availability. NTPC has already retired 3 GW of old capacity in the last financial year. This process can continue including the plants state gencos sell to NTPC over time. NTPC can focus on running super-critical plans, which reduce ambient pollution by up to 80 per cent over the old plants and create a few large assets across the country. Presently, NTPC has about 20 thermal power sites. Once NTPC rationalises its consolidation and expansion plants, there will be an opportunity to create dedicated railway lines for hauling coal from the coal rich eastern India to these sites.

The scrapping of old plants itself opens up a new industry segment. Like ship-breaking has become an established industry globally, retiring thermal power plants also need expertise in dismantling and disposing the scrap material. The process will also need skills of surveying, assessing, valuation and inventorying - an area where private firms can contribute. This will likely create new jobs and will need new skills development to ensure proper supply of experts.

Finally, as the consolidation takes place, private power generation players can better monetise their investments. Between 2006 and 2013, a rent-seeking private power generation industry was created with active collusion of various governments. An artificial scarcity of coal was created with production and judicial bottlenecks, creating an opportunity for middlemen to import coal from Indonesia and Australia despite India being a large coal producer herself. This costly fuel was then baked in the prices private players offered to state discoms, with states underwriting these inflated numbers in PPAs assuming that the plants will always need imported coal. This uniquely distorted arrangement has left private power players high and dry with the increased and transparent availability of coal under Goyal’s term. With cheap Indian coal available and with exponential increase in the renewable capacity taking place, states will always find cheaper sources of power to buy from. Several private plants thus have languished in the last two years with PLFs in late 50s or early 60s, further exacerbated by demand side slowdown. These private players can increase efficiency, reduce cost of operations and sell their unused capacity to states proactively while they retire their old power plants.

This refurbishment of India’s thermal power infrastructure will help reduce financial stress for state governments and private players alike and reduce bank balance sheet stress as plant assets start operating more efficiently and borrowers repay their debt and accumulated interest. This plan will also help India over the next couple of decades to conform to the stringent emission norms signed up for in various global climate treaties. Creation of a few large supercritical power plants and retiring old ones will result in new jobs, an area of focus for the Narendra Modi government. Indirectly, the combined central and state government investments in power sector will become more efficient and reduce government footprint in the sector.

Goyal’s plan to create a thermal power ecosystem which has high scale, high efficiency, high coal linkage predictability, and greater supply visibility for power-consumers is a win-win proposition for all players in the sector.