Old power plants: A lifeline for power generating equipment sector

Coal power plant (Representative Image: Getty)

Shishir Asthana Moneycontrol Research

A common problem for manufacturing units as they mature is the question of repairing or replacing their machinery. The solution to the decision generally depends on various factors like finances, the residual life of the machinery, the stage at which the products produced through these machines are in the product cycle, and finally on how productive is the machine vis-à-vis the latest ones available in the market.

If new machinery can lower the cost of production, the next question is whether the old machines can be refurbished and cost differential narrowed. At the end of the day, it is a financial decision for the company.

The domestic power sector is at present facing the same set of questions. The old power plants are not only costly to operate but they are also polluting. These plants would need to be retrofitted and designs changed to lower the cost of power generation. Also, additional equipment will have to be installed to meet the environmental norm.

A news report quotes the power ministry as saying that retrofitting old polluting units could increase their tariff by up to 93 paise per unit. The government has estimated a capital expenditure of Rs 88 lakh to Rs 1.28 crore per megawatt for retrofitting the old plants to meet new emission norms.

However, the government has wisely decided against going down that route. The report quotes a power ministry official as saying the ministry wants to use supercritical technology instead. The power ministry is already running behind schedule as the environment ministry had given them two years to meet these norms. The deadline lapsed last month.

The problem facing the power sector is in fact a blessing for the capital goods sector. About half of the country's thermal power plants are over 25 years old and some are close to the end of their useful lifespan of 40 years. These facilities account for 30 percent of the total installed capacity. Nearly 56 GW of power generating capacity might come up for grabs in the market.

It is necessary for the power plants to be replaced given falling power tariff rates. Efficient plants will lower the cost of power generation and at the same time meet the environmental norms.

The news comes at a time when the capital goods players in the thermal power plant space are starved of order flows. The move has the potential to revive the entire sector.

Additionally, the principle of disposing off old inefficient units is also needed in the renewable power space. Old wind power units are generating power at more than 3-4 times the current prices. Had it not been for a long-term contract which offers them a natural monopoly these units would have been shut a long time back.

Nonetheless, immediate action for old power plants can revive the capital goods sector and result in capital expenditure rising, the one parameter where the needle has not moved too much over the last 3 years. Going by the thumb rule of Rs 7 crore per MW needed for setting up a brownfield plant we are talking of Rs 175,000 crore of opportunity.