Captive Power Generation What Are the Economics

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Captive Power Generation : What are the Economics ?

V Ranganathan Damodar Mall

Galloping demand for power and mountingconstraints in its generation have forced

electricity boards all over the country toimpose power cuts. User industries havebeen forced to go for captive power plantsto tide over the situation.

In this article, V Ranganathan andDamodar Mall compare captive power andgrid power costs in Karnataka. At theobserved low utilization of between 6 and20 per cent, captive power cost is Rs 1.95while grid power cost is only 31 paise perKWH. The authors argue that the user

industries should pursue the options ofcooperative generation of power or becomea financing partner with the electricity

boards for assured and reliable powersupply.

V Ranganathan is Associate Professor andDamodar Mali is a student of the Post-Graduate Programme in Management atthe Indian Institute of Management,

Bangalore.

Electric power generation is a state controlledsubject. Of late, however, government has lib-eralized captive power generation for the user in-dustry for bridging the demand-supply gap.

The fact that private industries use captivepower answers the question of financial viability.For, the benefit in terms of prevention of margi-nal loss of production outweighs the cost of cap-tive diesel power generation. Industries whichhave a high value added for electricity input willnaturally insulate themselves through standbypower.

From the national point of view, the issuesare somewhat different. Here the objective of thepolicy maker will be efficient resource allocation.The alternatives differ for short and long runs. Inthe short and medium run, power cut is given andthe alternatives may be to

impose a uniform power cut on industries

impose an 'optimal' power cut, minimizingproduction loss and unemployment

allow for captive power generation.

In the long run, power cut is not a constraint,since extra capacity or reserve margin can be pro-vided for. Growing demand and persistent fundsconstraint are not sufficient arguments to neces-sitate the continuance of power cuts, sinceutilities can segment the market and equilibriatethe demand and supply by increasing tariffs.Thus, the long run alternatives are whether tosatisfy a certain level of peak demand by addi-tional grid capacity or by captive power. The al-ternatives have to be compared at the margin and

therefore it is not the average cost of electricity atthe high tension (HT) terminal or the HT tariffthat is relevant, but the marginal (average incre-mental) cost of electricity. This has to be com-pared with the cost of captive generation at thegiven level of demand for captive electricity. In


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cost-benefit terms, the benefit of captive powergeneration is not the saving in loss of productionbut the saving by not producing grid electricitysince this is the next best alternative.

Unit based captive power generation means

pressure on costlier and scarcer fossil fuels, lossof economies of scale, and a built-in capacity un-derutilization. However, it involves much re-duced lumpiness in investment and affords quickcapacity addition. This article investigates theeconomics of captive diesel power generationalong these lines with specific reference toKarnataka.

Methodology

Marginal cost of grid electricity for Karnataka is

computed from the plans, projections, and finan-cial statement of the Karnataka Power Corpora-tion and the Karnataka Electricity Board. An op-erational definition of marginal cost as averageincremental cost over a planning horizon is used,along the lines followed by the World Bank forcomputing marginal cost for the Andhra PradeshElectricity Board. The refinements incorporatedin this article are computation of marginal cost atvarious voltage levels and arriving at an equiva-lent marginal cost which is weighted average ofcapacity, energy, and service related costs andwhich is useful for comparison purposes. We

hypothesize that most of the captive diesel gen-eration capacity is grossly underutilized. We willalso compare the cost of captive diesel generationwith the cost of grid electricity.

Diesel generation sets can be found in differ-ent capacity groups and at varied levels of utiliza-tion. For a common norm as regards usage andcosting, a representative sample of data from dif-ferent installations is required. We mailed aquestionnaire to around 175 captive power instal-lations covering all regions of Karnataka forgenerating primary data.

Marginal Cost of Grid Power

Three broad categories of marginal cost are:

capacity costs

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energy costs

consumer costs.

Marginal capacity costs are basically invest-ment costs of generation, transmission, and dis-tribution associated with supplying additionalkilowatts.

Marginal energy costs are fuel and operationcosts of providing additional kilowatt hours.

Marginal customer costs are per unit incre-mental costs directly attributable to consumersincluding costs of hook-ups, metering, andbilling.

Relevant operations and maintenance costsas well as administrative and general costs mustbe allocated to these basic categories.

Capacity Costs

Additional Generation Capacity

The trend for the past decade shows a 7.5 per centyearly growth rate in the peak demand forKarnataka. With 1984-85 as base, the peak de-mand will go up from 1800 MW to 3710 MW inthe decade ending 1994-95, an addition of 1910MW (see Table!).

In a mix of hydro and thermal power generat-ing stations, a hydropower station is at themargin in KW terms because of its investmentstructure. Therefore, to estimate the marginalcapacity addition cost, the average incrementalcost for the hydro portfolio in the plan iscomputed.

A total hydel capacity of 802 MW is plannedto be added at a cost of Rs 731.12 crore (Table 1).The corresponding average incremental cost/KWis:

731.12 X 10

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Rs---------------- = Rs 9116/KW802 X 103

A typical storage hydroelectric station has twomajor components of cost: dam cost and powerhouse cost. Only the latter is capacity relatedwhich is about 55 per cent of the total cost. There-

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Similarly, other maintenance costs yield a rela-tively stable norm on a capacity rather than op-eration level basis.

Maintenance cost = Rs 300/KVA/year= Rs 375/KW/year

Total KW related cost = Rs 508 + 52 + 375= Rs 935/KW/year

One KW installed on an average generates 1500KWH every year (see Table 3). At this realisticnorm of 160 KWH/KW, the equivalent capacitycost works out to

Rs 935/KW/year = 935/1500 = Re 0.62/KWH

This is very high as compared to the capacitycost of grid power. At an ideal utilization of, say,10 hours a day (3600 KWH/KW), the cost compo-nent will come down to 26 paise/KWH.

Therefore, the total costs are

Re 0.62 + Rs 1.33 = Rs 1.95/KWH (at 22 per-cent [actual] utilization)

and

Re 0.26 + Rs 1.33 = Rs 1.59/KWH (at as-sumed ideal utilization)

Other Findings

To get information about the opportunity cost of

captive power, we asked the respondents whetheroutput will be affected if there is no power cut atall. A more or less unanimous answer was that theinstalled captive capacity can fully take care ofeven a very high level of power cut and, therefore,an unrestricted grid supply will only marginallyaffect the output level.

Thus, the opportunity cost of captive poweris much higher than the actual cost escalationintroduced by using diesel-based power. Nopower source is as bad as "no power."

To assess the quantitative correlation be-

tween the power supply patterns and outputlevels, several other factors (seasonally, rawmaterial availability, competition, etc.) that aredifferent for different industries have tosegregated.

As an illustration, the grid power supply,captive power generation, and the output levelfor one of the responding industries have beenplotted in Figure 1. While the captive generationprofile tries to fill the peaks and valleys in thegrid supply, the output level still seems in tunewith the grid supply profiles.

Some respondents have suggested that thereshould be tax reliefs for units installing captivepower plants, thus making the 'felt' pinch ofdiesel power generation slightly more tolerable.

Conclusions

The cost comparisons (HT) can be summarized asfollows:

Grid power 8.4 23.4 32.8

Captive power (at

observed utilization) 62.0 133.0 195.0

Captive power (at

ideal utilization) 26.0 133.0 159.0

While the higher energy component of thecaptive power cost is well known, the disparity incapacity costs is equally high.

Given the present installed capacity of300,000 KVA (approximately 240 MW) inKarnataka, the resources going into feed this

Vol. 12, No. 2, April-June 1987 53


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overcapitalization alone are to the tune of Rs 2.2crore a year1 even if the utilization rates are as-sumed to be the same for both alternatives.

Given the fact that 7 per cent of the totalpower generation in the country is through cap-

tive sets, the inference is clear. Also, there ismore idle capacity in smaller installations and, ascompared to the state-sector power stations, thecaptive power sources are only half as utilized.

In this context, the question of licensing ofcooperative captive generation (of the order of220 MW, etc.) in the private sector comes up.While FICCI and other organizations have beenmaking a case for it, the issue is deadlocked be-cause of differences in the perception of the prob-lem by the government and private industry.

The government looks at power cut as neces-

'Difference between capacity costs (Rs)/KW/Year =Rs (508 418) = Rs 90. Rs 90 X 2,40,000 KW = Rs 2,16,00,000/year

sitated by lack of funds. Private industry looks atit as inefficiency of the electricity boards, and be-lieves that it would perform better if the govern-ment gave it funds for private power generation.This argument is highly questionable and has lit-tle empirical basis.

The practical way out would be that eitherthe private sector seeks approval for cooperativegeneration committing its own resources withoutapproaching the government or financial institu-tions or becomes a financing partner with thestate electricity boards and provides additionalfinance for assured and reliable power supply.

For the economy, a rupee invested in a cap-tive plant is much more wasted than if it is putinto a large power plant. This should reduce thehesitation in expediting power generation prog-

rammes in the state sector. If the scarce funds donot go into a relatively efficient power plant, theywill be tapped in idle diesel generating sets sincethere is no other alternative.

Vol. 12, No. 2, April-June 1987 55

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