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Column: Fixing India’s power problem

Power stations meant especially for peak power shortages can address India?s massive load shedding

Vipul Tuli & Suhail Sameer

Most Indians are sweltering through power cuts for several hours a day. The majority of power cuts are due to peak power shortages. Currently estimated at 10% on an all-India basis, peak power shortages have become a constant feature of our power supply. The average peak power shortage during the 11th Five-Year Plan (2007-2012) was 9%. With increasing urbanisation, peak deficits are expected to increase to 12-20% by 2017 (graph 1).

To meet their energy needs during power cuts, most urban consumers rely on backup power from diesel generators or inverters. The average full cost of diesel backup power is between R20 and R25 per unit including fuel, cost of the equipment and maintenance (graph 2). While no one knows for sure how many backup gensets and inverters are being used today, it is estimated that over 40,000 MW of such backup sets exist across India, amounting to a sizeable one-fifth of our total generation capacity. The true cost of backup diesel power to the economy is even higher. The estimated net cost of subsidy to the exchequer for diesel alone ranges from R4,000 to R5,000 crore a year, assuming that the installed diesel capacity is used only for two hours a day. The actual subsidy losses could be two to three times this amount. And the costs in terms of pollution and healthcare are over and above this.

A better alternative to bridge India?s growing peak power deficit is to build peaking power stations specifically to meet the short duration peak demands. These would be plants that can be operated for a few hours a day, typically open cycle gas-fired plants, or hydro plants with adequate water storage. Solar power is also well suited for peaking demand.

Contrary to popular perception, the economics of peaking power stations are actually compelling for consumers. Even if imported liquefied natural gas (LNG), probably the most expensive alternative fuel, was used to generate power during the peak hours, the full cost of this power would be around R10 per unit. Adding distribution costs, consumers would pay R12 to R13 per unit, i.e. half the cost of diesel-based backup power. Assuming that peaking power amounts to about 10% of a household?s total electricity consumption, consumers could have reliable power round-the-clock by paying an extra 60-70 paise per unit on their overall tariff. The cost of peaking power would be even lower if other fuels were used instead of imported LNG. For example, if domestic gas were used, peaking power would cost consumers only R7 to R8 per unit (graph 2).

There is more than enough LNG available to be imported globally, even in the near term, and India has enough infrastructure for LNG imports. The effect on environment and health would net positive relative to diesel or inverters. Gas-fired peaking power plants can be set up from ground zero in less than 18 months. Yet we continue to suffer through power cuts each summer. Why is this, and what can we do about it?

Perhaps the root cause is that India has focused almost exclusively on building base load power generation capacity, primarily coal-fired or nuclear stations. These plants are designed to operate 24×7 for maximum efficiency, but cannot switch on and off fast enough to respond to peak demand. So while base load stations are necessarily the backbone of any national power generation fleet, they need to be supplemented by peak load stations, especially in a rapidly growing and urbanising country like India. Unfortunately, with the focus on base load, critical factors like power purchase norms for discoms, metering and billing infrastructure, gas supply agreements and tariffs are not geared towards peaking power.

McKinsey?s research shows that the most critical factors required for peaking power could likely be resolved relatively quickly through four specific steps that could bridge India?s peak power deficit.

Regulators should consider offering discoms the opportunity to buy peaking power through multi-year agreements with developers, so that developers are incentivised to build peaking power plants, and banks to finance them. This would require the government to finalise its peaking power policy and bidding documents, which have been under development now for quite some time, and would also require that peaking power be permitted to be purchased and included in the annual charges of discoms.

Gas supply, purchase and pipeline transportation agreements could be modified to allow gas to be consumed for only a few hours a day, and with seasonal variations. Over time, gas storage capacities can be created near urban centres, although sufficient gas pipeline capacity exists to meet current requirements.

Discoms could install time of day meters to give consumers the choice of paying for the reliability of continuous power supply, and bill accordingly. These meters would provide an added advantage of discouraging consumption in peak hours.

Enforcing renewable purchase obligations for discoms would encourage solar generation, which is well suited to meet peak requirements. Similarly, allowing hydro capacity to reasonably increase tariff in cases where the capacity is able to supply peaking power could likely still result in cheaper rates than gas or renewables. Remunerative tariffs would encourage developers to build pumped storage hydro plants, which are an economical option for peaking power.

These steps?especially the first two?could be implemented in a matter of weeks, and some states have already made the move. For example, Maharashtra offers large consumers the option of uninterrupted power by paying a reliability surcharge. With the policy and regulatory notifications, investments would also result in the rapid development of physical infrastructure that could be built in 12-18 months. For India?s urban consumers, paying 60-70 paise extra over their current discom tariffs may be a small cost in exchange for the convenience and comfort of living without generators, inverters and power cuts.

Vipul Tuli is a director in McKinsey & Company?s Delhi office, where Suhail Sameer is an associate partner

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First published on: 26-07-2013 at 02:36 IST
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