Power plant retirement policy

There are plans to retire 19 power plants of an aggregate capacity of 7339 MW as per IGCEP (Integrated Generation Capacity Expansion Plan) in the period 2021-2031. Due to the ongoing Current Account Deficit (CAD) crisis, current policy is to use as little imported fuel as possible and make do with local energy sources.

Current load shedding despite having ample capacity is mostly due to the fuel issue. Plants’ retirement may not be as simple issue as it may appear to be on the surface. There are a variety of reasons, which force the buyers or sellers to delay the plant retirements.

There is usually confusion or controversy as to who the loser is and who is the gainer? Can there be a power plant retirement policy or a set of criteria in this respect or things have to be decided on a case-to-case basis? We will examine the subject in this space at some detail and make use of some actual cases to elucidate the nature of issues and problems.

While plans provide for plants retirement at the end of useful life of 25-30 years, plant owners often lobby for extension of 5 or more years with the help and support of the user organizations. It has happened earlier and it is happening now.

The case of KAPCO (Kot Addu) power plants extension is under consideration. Earlier, KE successfully sought extension of two oil-fired power plants, despite opposition of other stake-holders. Hubco, which is to retire on 2027, has been trying for some form of extension: conversion to coal or otherwise.

As people retire, power plants retire too. Old power plants have maintenance, efficiency and technology issues. Old power plants have advantages as well having much lesser fixed cost due to debt pay-off and depreciation, but suffer usually from low efficiency and higher O&M cost; while new plants would have higher efficiency and lower fuel cost but suffer from high fixed costs and require full capital budget.

Power plant retirement has to be planned ahead. It is not sufficient to announce retirement date and expiry of generation license. Retiring plants by last day of retirement often provides useful services.

It is a part of regional power generation and transmission system. It may have some parts which are still useful and due to lack of replacement planning, may be badly needed.

There are ancillary services such as peak powering, frequency regulation, transmission and black-start management facilities. There may be a tussle or cooperation regarding the continuing use of these services and plant parts. Power producer may want to offer all parts of the plant and earn revenue while buyer/user may want to acquire only the needed services.

Perhaps the most important aspect may be the fuel cost in these days when fuel cost has gone high, although recently, energy prices have come down. New power plants have higher efficiency. Older power plants have typical efficiency of 40% or even less. New power plants such as combined cycle power plants have efficiency of more than 60%.

Fuel types may also influence retirement or renewal considerations. Gas/LNG may have to be imported and RFO may be available locally, facing storage and disposal issue. RFO is a natural byproduct of oil refineries that produce petrol and diesel. Earlier, most of the thermal power used to be produced on RFO.

Refineries insisted to sell locally and earn better price, although some of the refineries have started exporting at 25% lower price. Seasonal supply issues also affect the fuel choice. In winters, power demand is low but supplies also fall down due to low hydro production in winters.

Environmental issues may also be a determinant. KAPCO uses Low Sulfur Furnace Oil (LSFO), while most refineries in Pakistan produce HSFO. The choice of LSFO may be based on the liking for imports or may have genuine environmental policy issues. Foreign investors are usually more sensitive in this regard.

Another option is conversion or replacement. In the West, coal plants have been converted to biomass, gas and even solar or wind; that is more due to environmental and climate reasons.

The core parts of the power plants are engines or turbines/generators which may have a cost share of 50-60% and the auxiliary equipment and land and infrastructural cost may be the remaining 40-50%. Also the implementation time for conversion or replacement may be less than half of installing a green field power plant.

Power producer may also want to continue with the comfort of take-or-pay, while the buyer may want to shift to take-and-pay mode, especially when competitive market regime may be around the corner. Regulators not finding enough players for the ensuing competitive market regime may also like to push take-and-pay.

RoE indexation has created problems of affordability these days in the context of CPI approaching 36%. It is a general problem not restricted to retiring power plants. RoE of 17% itself is excessive. Consideration may be given for restricting RoE indexation to 10% per annum.

The case of KAPCO

KAPCO gas/oil/Diesel combined cycle power plant is of 1600 MW. KAPCO plant has some useful ancillary equipment which has enhanced its case of renewal. It has a switchgear plant, a black-start facility, transmission infrastructure and others.

The plant has been working at a load factor of 47% and the petitioner has applied for a load factor of 30% (500 MW out of 1600 MW). Its LSFO power plant component has an advantage for environmental reasons but has a disadvantage from cost and foreign exchange point of view, as local refineries, except ARL, produce HSFO.

Its generation license expired in 2021, which has been renewed by Nepra (National Electric Power Regulatory Authority) recently for three years as against the petitioner’s request of 5 years. There has been a controversy about it. Senate of Pakistan has opposed the renewal and has asked for its cancellation. Senate’s jurisdiction has, however, been contested.

NTDC (National Transmission and Dispatch Company), NPCC (National Power Construction Corporation) and MEPCO (Multan Electric Power Company) have supported the renewal application for their respective relevance. It is contested if full plant renewal was necessary or ancillaries only could have been renewed. Plant owners would definitely like to get full renewal in order to maximize revenue.

The main problem with the KAPCO plant is its low thermal efficiency of 43% as opposed to 60% plus efficiency of new combined cycle power plants. In the current circumstances of currency depreciation and lack of foreign exchange, the issue has acquired a serious dimension.

The positive aspect is that a green field site would have a fixed unit cost of 4.5 USc as opposed to Rs.5.00per unit asked for by the petitioner. Thus total cost comparison may favour the renewal case and variable cost comparison may oppose the renewal.

KAPCO has offered both take-or-pay and take-and-pay arrangements for the two parts of the plant. The dominant opinion is that the whole 500 MW be on take-and-pay basis. This would help jump-start the competitive market system, CTBCM (Competitive Trading Bilateral Contract Market).

The case for life extension of other power plants may also be strengthened if take-and-pay is adopted as a standard approach. However, its pricing may require a different approach with which Nepra has little experience. Spot market is another easier solution which Nepra has not considered or is confused about.

There appears to be emergent reasons for renewal as alternative arrangements have not been made, as is the case usually in the system. It is hoped that some amicable and equitable solution can be found with mutual and public consultation process.

For future, retirement planning, renewal or closure should be done well in advance so as to avoid emergencies and unnecessary pressure on the decision-makers causing controversies of various kind. A combination of policy and case-to-case considerations may be an adequate approach.

Keeping in view the ongoing economic crises, new investment may not be forthcoming or may be expensive. There may be need for other power plants extension/renewal than might have been considered while making IGCEP and other plans. However, under take-or-pay system, there is risk of awarding unwanted and undesirable extensions. Take-and-pay arrangement appears to be mutually useful approach for the renewal of retiring power plants, which should be adopted.

Copyright Business Recorder, 2023