India depends on coal for meeting about 75% of its power needs. The country accounts for about 7% of the world’s total CO2 emissions.
In 2015, Coal India Ltd was found to be corporation with the largest carbon footprint in the world.
While countries such as China and USA no longer report yearly increases in their greenhouse gas emissions, India continues to report increases in the range of 5% per year due to its dependence on coal for power.
Besides having 225 Gigawatt of operational coal-fired power plants (compared with 9 GW of solar), India has another 65 GW of coal-fired plants under construction.
It is in this context that the results of the latest auction under India’s National Solar Mission achieves significance. India’s Solar Mission works by letting companies competitively ‘bid down’ the price that they are willing to accept for selling power to government-controlled power distribution companies.
Six years ago, the price was discovered at above Rs 11 per kWh (unit of electricity) and by last year, it had fallen to about Rs 4.6 per kWh.
Though Rs 4.6 (7¢) per unit was comparable to what many end consumers in India pay for electricity, it still did not make sense for power distribution companies to buy from these solar plants without subsidies.
The reason? Coal was still cheaper.
According to data from National Thermal Power Corporation of India — the country’s largest producer of coal-based electricity, it was selling coal-generated power in India at Rs 3.07 in 2016.
If a utility was to buy power from a solar generator at Rs 4.6 per unit last year, it would have to pay 50% more than what it would have had to pay to NTPC for coal-based power.
Given the extremely tight financial conditions under which utilities run, the incentive to buy solar power was limited.
However, the latest such auction should set the record straight. In the auction that ened on Feb 10, the winning price quoted was Rs 2.98 per kWh. This is comparable to the average price of Rs 3.33 for coal-based power in India, according to Central Electricity Authority of India.
The three companies who quoted the price of Rs 2.98 paise — Mahindra Renewables Pvt. Ltd, Acme Solar Holdings Pvt. Ltd and Sweden’s Solenergi Power Pv — were given contracts to set up generation facilties of 250 MW each.
The plants will be operational in the second half of 2018 and will be located at Rewa in Madhya Pradesh, one of India’s sunniest states.
Part of the reason for the aggressive bids was the central government’s aggressive push to make solar components cheaper.
Given the negligible running costs, these bids are largely a factor of expected solar insolation in the area and the size of the upfront investment required to put up the plant.
In this direction, the government announced days before the auction began that tempered glass used in solar equipment will be made duty free from April 1. It also cut duties on other raw materials used in solar equipment to 6% from 12.5%.
However, as more and more production shifts to solar, the demand for coal would go down, impacting coal prices and driving down the price of coal-based electricity.
The trend is already visible.
In the year ended March 15, NTPC charged Rs 3.11 for every unti of coal-generated power, including a coal-price-linked component of Rs 2.02 per unit of electricity.
The total price fell to Rs 3.07 per kWh in the year ended March 2016 as coal prices declined (see chart above). Within the overall price, the coal-price-linked component fell by 6.4% on year to 1.89 rupees per unit for the year.
By the Oct-Dec quarter of 2016, the price-linked component had fallen further to Rs 1.78 per unit and the total price charged by NTPC for coal-generated power fell below Rs 3.00 per kWh.
However, given that the price of solar equipment falls at a rate of around 20%-25% per year, it is likely that the solar producers will be able to remain competitive in the face of crashing coal prices as well.
Moreover, out of the Rs 3.00 per unit that NTPC charges, about Rs 1.25 comprises the cost of capital and non-fuel operating charges. These charges, which make up about 42% of the total price of coal-fired electricity at present, historically rise at a rate of about 8% per year — limiting the overall decline in coal power prices.