Public Disclosure Authorized Regulatory Study to Encourage Energy Efficiency through Investment in Rehabilitation of Coal fired Generation Plant in India Public Disclosure Authorized Study funded by Public Disclosure Authorized Energy Sector Management Assistance Program (ESMAP) October 2008 Public Disclosure Authorized Regulatory Study to Encourage Energy Efficiency through Investment in Rehabilitation of Coal fired Generation Plant in India Study funded by Energy Sector Management Assistance Program (ESMAP) IPA Energy Consulting 41 Manor Place Edinburgh EH3 7EB Scotland Tel: +44 (0) 131 240 0840 Fax: +44 (0) 131 220 6440 Email: [email protected] Web: www.ipaenergy.co.uk TABLE OF CONTENTS TABLE OF CONTENTS LIST OF COMMON ABBREVIATIONS 3 1. EXECUTIVE SUMMARY 5 2. INTRODUCTION 14 2.1. Context of Study 15 2.2. Background – What EE R&M entails and existing incentives 15 3. CONSTRAINTS & BARRIERS 22 3.1. Regulatory Framework 22 3.2. Beyond Regulatory Framework 26 4. FRAMEWORK FOR RANGE OF OPTIONS 28 4.1. Framework for incentivising efficient R&M decisions 28 4.2. Evolving Indian Power Market impacts choice of regulatory role 29 4.3. Conclusions 31 5. OPTIONS CONSIDERED FOR THE STUDY 32 5.1. Discussion of Options 32 5.2. Implementation Issues / Pre-requisites for Implementing the Framework 43 6. ANALYSIS OF THE OPTIONS 46 6.1. Illustrative Financial Model 46 6.2. Responsibility and Risk sharing in the Three Options 49 6.3. Redressal of Non Regulatory Barriers & Constraints 49 7. CONCLUSIONS & RECOMMENDATIONS 52 7.1. Potential Improvements 52 7.2. Conclusions on proposed regulatory options 55 7.3. Next steps 58 ANNEX 1 - EXISTING FRAMEWORK 59 Existing framework 59 Cost and Benefit inherent in the Existing Framework 59 ANNEX 2 - DETAILS OF THE MODEL 66 General Assumptions used for the modelling 66 Options considered for the Model 67 Sensitivity of the outcomes to variation in the assumed R&M cost 73 ANNEX 3 - TECHNICAL BARRIERS TO BE ADDRESSED 77 Technical barriers – improved energy accounting and base-lining are a prerequisite 77 Measurement: Disaggregation of losses chain helps focus on the problems 77 Asset Management Plan 78 Evaluation: Range of possibilities, inter-se evaluation of costs-benefits-risks, and prioritisation 78 Target setting: Based on prioritised options 80 O&M practices to achieve and sustain the plans 80 ANNEX 4 - RELEVANT POLICIES AND REGULATIONS, RECORD OF STAKEHOLDER PERCEPTIONS AND BARRIERS IDENTIFIED 82 Introduction 82 Policy, Legislative, Regulatory and Planning Framework 82 1 TABLE OF CONTENTS Applicable Regulatory Rules 99 Stakeholder perspectives 109 Constraints and barriers identified 116 ANNEX 5 – INDICATIVE BENEFIT ANALYSIS 128 ANNEX 6: SETTING THE NORMS 141 Operating norms 141 Asset Management Plan 144 Heat Rate Reporting & potential enhancement 145 ANNEX 7 - CONTRACTING OUT R&M WORK 148 Potential power plant contractors 148 ANNEX 8 – REPORT ON INTERNATIONAL COMPARATORS 151 Introduction 151 Australia 156 Great Britain 167 USA 182 South Africa 193 Summary and Conclusions 201 Generation policy instruments in selected western countries 213 UK Government Energy policy 228 ANNEX 9 - REFERENCES 233 List of people met 233 Input from attendees at Workshop 234 List of documents reviewed 235 2 LIST OF COMMON ABBREVATIONS LIST OF COMMON ABBREVIATIONS ABT...................... Availability Based Tariff AC ........................ Alternating Current ADB ..................... Asian Development Bank AG&SP ................ Accelerated Generation and Supply Programme AHP...................... Ash Handling Plant ANSI .................... American National Standard Institute BHEL ................... Bharat Heavy Electricals Limited C&I....................... Control & Instrumentation CEA...................... Central Electricity Authority CAPEX................. Capital Expenditure CDM..................... Clean Development Mechanism CERC ................... Central Electricity Regulatory Commission CHP...................... Coal Handling Plant CW ....................... Cooling Water DC ........................ Direct Current DERC ................... Delhi Electricity Regulatory Commission Discom ................. Distribution Company ERC……………...Electricity Regulatory Commission EU ........................ European Union EUR...................... Euro FBA...................... Furnace Bottom Ash FoR....................... Forum of Regulators FSA ...................... Fuel Supply Agreement GEF ...................... Global Environment Facility Genco……………Generating Compnay GHG ..................... Greenhouse gases GOI....................... Government of India GT ........................ Gas Turbine HFO...................... Heavy Fuel Oil HHV ..................... Higher Heating Value HP......................... High Pressure HR ........................ Heat Rate IP .......................... Intermediate Pressure IPP........................ Independent Power Plant/Project JV ......................... Joint venture kWh...................... kilowatt hours LE......................... Life extension LHV ..................... Lower Heating Value LIBOR.................. London Interbank Offered Rate LP ......................... Low Pressure MoP...................... Ministry of Power MYT/MYTO........ Multi Year Tariff/Order NEP ...................... National Electricity Plan NPV...................... Net Present Value NTPC ................... National Thermal Power Corporation O&M .................... Operation & Maintenance OEM..................... Original Equipment Manufacturer OPEX ................... Operation Expenditures PC......................... Pulverised Coal PF ......................... Pulverised Fuel PFA ...................... Pulverised Fuel Ash 3 LIST OF COMMON ABBREVATIONS PFC....................... Power Finance Corporation PiE........................ Partnership in Excellence PLF………………Plant Load Factor PPA ...................... Power Purchase Agreement PPP ....................... Public Private Partnership Rs ......................... Indian rupees R&M ................... Renovation and modernisation RLA...................... Residual life assessment SEB ...................... State Electricity Board SERC.................... State Electricity Regulatory Commission SHR...................... Station Heat Rate ST ......................... Steam Turbine T/A ....................... Turbine Alternator UPERC................. Uttar Pradesh Electricity Regulatory Commission WB ....................... World Bank WBERC................ West Bengal Electricity Regulatory Commission YTD ..................... Year-to-date Prefix Symbols and Multiples P - pera = x 1015 T - tera = x 1012 G - giga = x 109 M - mega = x 106 k - kilo = x 103 h - hecto = x 102 da - deca = x 10 d - deci = x 10-1 c - centi = x 10-2 m - milli = x 10-3 μ - micro = x 10-6 n - nano = x 10-9 Units bar - bar = 105 Pa (pressure) cal - calorie (energy) ºC - degree Centigrade (temperature) h - hour (time) Hz - Hertz (frequency) K - kelvin (temperature) kg - kilogram (mass) J - Joule (energy) m - metre (length) N - Newton (force) Pa - Pascal (pressure) s - second (time) t - tonne = 103 kg (mass) V - Volt (electrical potential) VA - Volt Ampere (power) W - Watt (power) Wh - Watt hour (energy) 4 SECTION 1 EXECUTIVE SUMMARY 1. EXECUTIVE SUMMARY • Background The Indian power sector suffers from considerable supply shortages. The Government of India (GoI) is addressing this problem both through a major new build programme (including certain fiscal incentives for construction of larger and more efficient plant) and through rehabilitation (renovation and modernization or R&M as it is known in India) of existing coal fired plant. Around two-thirds of India’s existing 65,000 MW of coal fired plant capacity is owned by State Government utilities, but much of this is reported to be in a poor condition, with low load factors and station heat rates of up to 4,000 kcal/kWh. Current R&M activity is not keeping pace with the requirements. R&M implementation has lagged significantly behind the requirements over the 10th plan period (2002-07), and during the current 11th plan period nearly 13,000 MW of R&M is targeted. The GoI has taken several policy initiatives to support R&M activity. This is reflected in the Electricity Act 2003 and the National Tariff Policy (2006). The National Tariff Policy states that - “Renovation and modernization (it shall not include periodic overhauls) for higher efficiency levels needs to be encouraged”. The tariff policy goes on to advocate the use of a multi-year tariff framework that includes capital costs of rehabilitation and allows the sharing of these benefits. However, despite several policy and programme initiatives by the GoI, pace of R&M in India remains extremely slow. Clearly, there are a number of barriers affecting the rate of investment. The GoI has requested the World Bank and Global Environment Facility (GEF) to demonstrate the viability of energy efficient R&M practices in three coal-fired generation units across the states of Maharashtra, West Bengal and Haryana. Within this context, this study has the objective of providing power sector regulators and other stakeholders in India with “a coherent understanding of regulatory options available to encourage investment in … energy efficient renovation and modernization (EE R&M) at the state level.” The project also aims to develop workable regulatory solutions derived from a comprehensive understanding of the issues in India and, where relevant and appropriate,