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Environment: Issues and Challenges in Thermal Power Generation International Conference on Thermal Power Generation – Best Practices and Future Technologies Organized by National Thermal Power Corporation Limited United States Agency for International Development Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 1. Introduction Development of power sector has a direct correlation with economic development of the country (Ferguson, Ross et. al. 2000; Samouilidis, J. E. and Mitropoulos, C. S. , 1984; Yang, 1998; Cheng, B.

S. and Lai, T. W. 1997; Stern, D. I. , 2000; Sajal Ghosh, 2000). Figure 1. 1 shows in India with the growth of GDP, how the electricity consumption, energy consumption and carbon emission has grown. Figure 1. 1: Energy, Electricity, Carbon and Economic Growth From the figure, the positive correlation of the GDP growth and the electricity consumption can be observed. As seen in the figure, post 1990s the carbon emitted from the electricity sector has reduced. Also, the consumption of electricity has growth at the higher rate than that of GDP.

In the next few sections we will try to synthesize what will be the relationship between GDP, Electricity consumption and environment in the future (Till year 2030). The focus will be on the power plants. After assessing the relationship between GDP, power sector and emissions we will enumerate the various instruments that the government of India can formulate to regulate the power sector and environment. 2. Power Sector of India Power is a critical infrastructure for economic development and improving the quality of life. For this reason, Power has been given due importance by the policy makers of India since independence.

Since independence the generating capacity has increased from 1. 362 GW to over 100GW in 2002. Over 500000 villages have been electrified. These are achievements in themselves. However, there have been certain problems. Some of the problems are the per capita consumption of power has stayed low (350 kWh); The State Electricity Boards (SEBs) are making huge losses; the electricity prices are high etc. For this reason India has started power sector reforms from early 1990s. In India, Power is a concurrent subject. Thus, both the center and the state are responsible for developing power sector.

In 1990s after opening up of the power sector, various private players also invested in power generation. Pre 1990s private players were present only in some urban centers like Kolkata (Calcutta Electricity Supply Company), Ahmedabad (Ahmedabad Electricity Company), Mumbai (BSES and Tata) etc. The private share in 2002 has gone up to around 10% of the installed capacity. The central share is around 30% and the rest 60% is capacity installed by the SEBs and State Departments. However, in terms of additional capacities each year, after 1990s the private sector has been almost equal to that of state and center.

In 2002, the addition capacities of state, 2 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad center and private sector were respectively 1394 MW, 905 MW and 816 MW. Figure 2. 1 shows the change in ownership pattern in Power Sector. Figure 2. 1: Ownership Pattern in Power Sector Source: SEB 2002 Historically, Indian power sector has been dominated by coal as the predominant fuel source of power. The installed capacity of coal based power plants has gone up from 7. 508 GW in 1971 to 60. 655 GW in 2001. Hydro power is the next important fuel source for India. It was 6. 8 GW in the year 1971 (40% of total capacity) which went up to 15 GW (25 % of the total capacity in the year 2001. From the 1990s, Gas is emerging as one of the chosen fuel type. Renewables are present in the form of wind, solar, bio mass etc, but it represents less than 5% of the installed capacity. Figure 2. 2: Fuel Mix of Generation Capacity Source: SEB 2002 3 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad In the year 2000 the power sector contributed around 41 % of the CO2 and around 40 % of the SO2. Figures 2. 3 and 2. 4 respectively show the contribution of CO2 and SO2 from various sources.

It is clear the large point sources (LPS) have been the major contributor in both CO2 and SO2 emissions. With in the LPS, the power plants have the highest share of the emissions. Figure 2. 3: CO2 emissions from Power Plants Figure 2. 4: SO2 emissions from Power Plants The 16th EPS predicts that the power consumption of India will grow around 2. 5 times of 2001 and grow to 1318 Twh in the year 2016. However the power generated by coal will still dominate. The Blue print of power sector development predicts that 52% of the power generated in India in 2012 will still be from coal.

While gas will be 15 %, hydro will be 27% and rest will be renewables and nuclear. In the following sections we will try to find out what will be the effect of growth and fuel mic on emissions. 4 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 3. Study of Emissions from Power Plants and other Large Point Sources 3. 1 Methodology The emission sources may be broadly classified as Large Point Sources (LPS; Example Power Plants), area sources (Example: Agricultural land) and line sources (Example: transportation sector). In the present analysis, the area and line sources have been combined.

The combined representation is called area sources. The aggregate national emissions are the sum of LPS and area source emissions. For future emission projections at LPS and area source levels, AIM/Local model with Geographical Information System (GIS) support has been used. The AIM/Local model follows the approach of linear programming to find an optimal solution by selecting a combination of technologies with the least cost while satisfying the given constraints of fulfilling the demand and meeting the environmental targets and/or energy supply constraints in the specific region (AIM Project Team 2002).

This model estimates the emissions from the LPS and area source, which can be used to calculate the total emissions from a region. Emission calculation methodology used in AIM/Local model is in line with the recommended methodology of the Intergovernmental Panel on Climate Change (IPCC 1996) and follows a similar approach as used by (Li et al. 1999) and (Garg et al. 2001a, 2001b). Indian AIM/Local model is developed for five major sectors namely power generation, industrial, transport, residential and agriculture sectors. The choice of these sectors is based on their importance in the national energy consumption.

The industrial sector covers fifteen major industry types. Each sector is modeled with considerable technological details about consumption of different energy forms, emission of various gases, cost components, and technological shares. Power generation and industrial sectors provide all the LPS for the analysis whereas the other sectors have been modeled as area sources. The AIM/Local model, suitable for estimating future emissions from LPS and area sources, is demand driven. The end use sectoral demands in turn depend upon national macroeconomic growth projections.

Based on the last 30-year time series GDP data, government projections and expert opinion, the Indian GDP is assumed to grow in real terms by 6% per annum on an average during 2000-2015, by 5% during 2015-2025, by 4% during 2025-2035 and by 3% in the later half of the 21st century under the reference scenario. The Indian GDP grows 4. 8 times at an annual rate of 5. 2% and population rises from the present 1 billion to 1. 35 billion between the years 2000 to 2030 (UN 1998) indicating a four-fold increase in per capita income levels. The industrial end use sector demands saturate in the long run following a logistic model.

This is divided into LPS and area demand. Excess demand over and above the capacity of the LPS has been taken as area source demand in case of industries where the total estimated national demand exceeded the total capacity of all the LPS considered. The autonomous energy efficiency improvements (AEEI) in end use technologies supplying these demands capture improvements due to better management practices, learning curve, improved infrastructure, retrofitting for the existing demand technologies and incremental technological interventions.

The AIM/Local model also captures the present policy dynamics to reduce anthropogenic air pollution by various measures including fuel quality improvements, adopting cleaner technologies and stricter enforcement of emission regulations. Fuel quality improvement includes coal beneficiation, increased use of imported coal (lower ash and higher calorific value than the average Indian coal), and reduction in sulfur contents of petroleum products. Production quantity for an LPS has been estimated on the basis of the sectoral demand elasticity and the past production trends of the plant, wherever available.

Information regarding the new LPS till year 2010 has been taken from various data sources like CMIE (2002b) and policy documents of the government. New LPS locations beyond the year 2010 have been estimated based on past development trends, retrofitting expansion options for the existing plants, studies related to suitability of industrial locations in India, and present policy dynamics. These are however indicative and not conclusive since the actual LPS locations may vary as future unfolds. 5 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 3. 2 Data Sources and Coverage

Many diverse data sources were utilized since there is no comprehensive database covering all the types of emitters for India. These included published documents of the Government of India, state governments, government organizations and institutions, industry federations and autonomous organizations covering various sectors and fuels (Garg et al. 2001a, 2001b, 2002). Future LPS data was mainly taken from published reports and databases like CMIE (2002a, 2002b). These provide status information of the various planned investment projects in India (power, refineries, cement, steel and fertilizer plants, etc. till almost 2010. Coupled with the retrofitting and capacity augmentation options for the existing plants, present policy directives of the government and expert opinion, LPS information for the next 30 years was assimilated. We have tried to cross verify each existing LPS data using more than one data source providing a profound richness and robustness to the base data. We have projected CO2 and SO2 emissions in the present paper since LPS have a dominant share only for these two emission types. 3. 3 Reference scenario The reference scenario assumes the dynamics-as-usual, i. e. ontinuation of macroeconomic (including structural changes in the economy), demographic and energy sector trends (such as autonomous energy efficiency improvements and penetration of clean and renewable fuels and technologies), as well as government policy trends. There are no direct climate change policy interventions in the reference scenario. The reference scenario analysis shows that during 2000-2030, energy use will grow three times and carbon emissions from energy will grow 2. 7 times (Fig. 3. 2). Under the dynamics-as-usual, the energy system shall continue to depend on fossil fuels, primarily the domestic coal.

Between years 2000 and 2030, carbon intensity of GDP declines at 1. 9% per year (Fig. 3. 4). The improvement in carbon intensity is contributed mainly by the decline in energy intensity at 1. 5% annual rate and the rest is contributed by the substitution of the share of coal in energy by gas and marginally by renewable energy. Table 3. 1: Large point source coverage over the years for India Sector Power Energy Intensive Industries Sub – Sectors Coal & Oil Natural Gas Steel Cement * Fertilizer Paper Sugar Caustic Soda H2SO4 Manufacturing Aluminium (Al) Copper ore smelting (Cu) Lead ore smelting (Pb) Zinc ore

Processes Industries 2000 82 12 10 85 31 33 28 19 63 3 8 5 3 382 LPS 2010 2020 111 131 17 20 16 22 98 110 41 52 38 43 28 29 21 23 64 66 4 5 9 10 6 7 4 5 457 523 2030 150 23 28 123 62 48 30 26 68 5 11 8 5 587 Total 6 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Although CO2 emissions grow annually at 3. 4%, the SO2 emissions rise at much lower rates. This is due to policies that are already under implementation as well as increasing public pressure on national policy makers for local pollutants, which is not the case for the GHG emissions.

The CO2 and SO2 emission trajectories move in closer bands till 2010 due to continuation of existing vintages. Thereafter, while CO2 emissions continue to rise (Fig 3. 2), the SO2 emissions begin to decline following the Kuznets curve (Fig 3. 1) phenomenon (Kuznets 1958). The GHG and local pollutant emissions are thus decoupled in future. SO2 emission reduction happens from mandatory use of Flue Gas Desulfurisation (FGD) in large coal power plants, introduction of low sulfur diesel, washing of coal and stricter enforcement of local air quality regulations. These policies however do not affect the GHG emissions. Figure 3. : Kuznet’s curve Phenomenon for SO2 emissions Figure 3. 2: Energy, carbon, electricity and GDP 7 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Figure 3. 3: GDP intensities of energy, electricity and carbon There is an interesting emission dynamics evolving in India and transport sector is at the center of this development. The sulfur content in the diesel oil supplied to the metropolitan cities (Delhi, Mumbai, Chennai and Kolkata) has been decreased during the year 2000 from 1% sulfur by weight to 0. 25% by the Indian refineries as per the Indian government directives.

The sulfur content has been further reduced to 0. 05% by weight in Delhi by late 2001. This has resulted in an appreciable decrease in SO2 emissions from the transport sector in these cities. These four cities account for almost 8% of all India diesel consumption in 2000. Diesel, in turn is almost 40% of the national petroleum product consumption and transport sector accounts for almost three fourths of this consumption. Although the effect of this emission dynamics may not be felt in the overall national SO2 emissions, which have continued to rise, the long-term implications are appreciable.

Besides these there has been recent Supreme Court judgment that has ordered Euro II standards to be followed for all new cars in India, which will be upgraded to Euro IV by 2005 (Mashelkar et al. 2002). While this is not very significant for SO2 control, it shows the mind-set of the judiciary and policymakers to control local pollution. Moreover it is necessary to have low sulfur diesel for meeting the emission norms beyond Euro II. The reduction in SO2 emissions would be further strengthened by another recent policy decision on mandatory washing of coal that is used 700 Km away from the mine mouth.

This measure is aimed at reducing fly ash and also simultaneously reduces some sulfur. Since, over a third of coal is used beyond 700 Km, this measure is expected to start reducing SO2 from coal use in near future. This policy dynamics manifests in a reduction in SO2 emissions in future even though the absolute energy consumption, and therefore CO2 emissions, continue to rise. Coal remains the mainstay of the Indian energy system but its use becomes cleaner due to higher penetration of clean coal technologies (WB 1997). Coal consumption increases about 2. times during 2000-2030 from 310 Mt in 2000. About 90% of the Indian coal product consumption is by LPS for power generation and industry. Residential coal consumption (area sources) for cooking purpose is mainly limited to lower middle class households in semi-urban areas. The urban households normally use LPG and kerosene, while fuel wood, dung cakes and electricity are also consumed in small proportions. Commercial establishments like hotels and restaurants consume some coal for cooking but their consumption is miniscule in comparison to the LPS coal 8

Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad consumption. Biomass supplies the rural energy demand to a large extent with kerosene supplementing it partially. The sectoral fuel consumption indicates continued dominance of power sector in coal use and transport in petroleum products with each having 70 percent share in 2030. Transport sector coal consumption is negligible for future years due to phasing out of coal based steam traction from Indian Railways. LPS dominate power sector consumption while transport sector has area source dominance.

Power sector share in natural gas consumption increases to more than half from the present one third, caused by increasing competitiveness of Combined Cycle Gas Turbine technologies (CCGT) for electricity generation (Shukla et al. 1999). Gas consumption is also LPS dominated and rises rapidly in industries like fertilizers and petrochemicals. While the share of gas in primary energy still remains low, the trends suggest a rising penetration of gas, most of which would have to be imported. The distribution range of Power plants and other LPS emission is shown in figures 3. and 3. 5. The largest 50 LPS which are mainly power plants contribute almost 50% of all India emissions in 2000, which decreases to 41% in 2030 as the emissions from smaller LPS increase. Figure 3. 4: CO2 emissions form Power Plants Figure 3. 5: SO2 emissions from Power Plants 9 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad The CO2 and SO2 emissions from LPS and area sources over the years for reference case are illustrated in Fig. 3. 6 and Fig. 3. 7 respectively. Tables 3. 2 and 3. indicate that Power Plants and other LPS emissions would continue to be major contributors to national CO2 and SO2 emissions in future. The share of LPS in SO2 emissions decreases marginally in the later years as compared to CO2 emissions. This is because the SO2 emissions from LPS as well as some area sources such as transport sector reduce considerably but the emissions from the small-scale industries like brick making, which depend on coal, continue to grow. These small establishments though essentially point sources are spread all over and have been classified as area source in the model.

This reduction of LPS share in SO2 emissions further indicates that the disjoint between the GHG and local pollutant emissions, discussed earlier, is unfolding gradually in India. Table 3. 2: CO2 Contribution from Power Plants (%of Total Indian Emissions) Sector Power Others 2000 41. 3 58. 7 2010 41. 5 58. 5 2020 43 57 2030 48 52 Table 3. 3: SO2 contribution from Power Plants (% of Total Indian Emissions) Sector Power Others 2000 44. 5 55. 5 2010 47. 1 52. 9 2020 46. 5 53. 5 2030 40 60 The nature of the future trends in the CO2 and SO2 emissions from power points and other LPS has implications on the policy framework.

In the following section we discuss some of the alternative instruments available as regulatory options. 10 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Figure 3. 6: Regional distribution of CO2 emissions Million Tons 0 5 10 15 20 30 40 2000 Million Tons 21 2030 11 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Figure 3. 7: Regional Distribution of SO2 Emissions Million Tons < 0. 01 0. 03 0. 07 0. 11 2000 0. 15 < 0. 20 Million Tons < 0. 01 0. 01-0. 017 0. 017-0. 026 0. 026-0. 035 0. 035-0. 044 0. 044-0. 053 0. 053-0. 60 > 0. 060 2030 12 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 4. Instruments for Environmental Regulation Policy instruments are the “techniques at the disposal of governments to implement their policy objectives” (Howlett 1991). Environmental policy instruments are classified into the following broad categories: command and control instruments, market-based or economic instruments, voluntary approaches (like unilateral commitments, negotiated agreements, and public voluntary schemes), and informational designs like education, information and moral suasion.

The possible categories within each instrument and their characteristics are summarized in Table 4. 1. Table 4. 1: A typology of environmental policy instruments Broad category Instrument Type Nature Framework based Qualitative performance requirements standards requiring interpretation Command and Performance based Control Uniform quantitative performance requirements. standards Mechanisms Technology based Uniform requirement to use a particular technology. tandards Internalizing external costs through charges on Charge Systems consumption or production. Trading Creating a market in pollution rights. mechanisms Economic Financial Mobilizing financial resources for environmental Instruments Instruments protection (e. g. loans, funds, tax breaks). Liability Inducements to internalize costs through threat of Instruments subsequent legal action to recover costs. Removal of Removal of existing subsidies to environmentally perverse incentives damaging activities and products.

Unilateral Voluntary undertaking by firms or industry groups commitments Public voluntary Voluntary adoption of standards, procedures, targets Voluntary schemes etc which have been developed by public bodies approaches Contracts between public authorities and industries Negotiated including targets, timetable and implicit or explicit agreements sanctions for non-compliance Education, Education, Corrects lack of information; Builds capacity to information and information and respond; Appeals to values; Corrects/ modifies moral suasion moral suasion values Source: Sorell 2001 The policy instruments differ in their ease of implementation, the impacts on the polluters as well as the revenue implications. They also differ in terms of the extent of government intervention and the role of other environmental institutions.

Since the Stockholm Conference in 1972, command and control mechanisms and economic instruments have assumed a significant role in environmental management. Both the categories of instruments have certain strengths and weaknesses and these have been brought out by a number of studies. These are summarized in Table 4. 2. 13 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Table 4. 2: Attributes of the instruments: Their strengths and weaknesses Category Strengths Weaknesses Command • Force of law. • Inflexible to accommodating and Control • Dependability and Clarity. changes in economic conditions Mechanisms • Consistency and Predictability. and abatement technologies. • High informational requirements, • Accountability. ith regulators required to keep track of technological changes. • Inefficient, as they give limited incentive for innovation or going beyond compliance. • Administrative complexity. • High enforcement costs. • Focus on large point sources like industrial plants, rather than on diffused source Economic • Static efficiency: • Outcome may be unpredictable Instruments a) Creates financial incentives for (taxes). abatement. • Administrative and monitoring costs may be comparable with b) Firms free to choose abatement CAC. technologies that minimize costs. • Undesirable distributional • Dynamic efficiency and greater impacts. flexibility in long-run: • Politically contentious. a) Encourages innovations. ) Provides incentive for continuous improvement. • • • Voluntary approaches • • • • Reduces compliance costs More flexible to changes in economic conditions or abatement technologies Minimal informational requirements help to decentralize decision-making. Raises revenues. Flexible Low resource requirements Greater peer pressure as well as pressure from interested stakeholders More effective when public and private interests coincide. Generating awareness of the issues and their solutions. Information required for effective policy formulation and implementation. Modest administrative burden Higher political acceptability More effective when public and private interests coincide.

Pressure could be insufficient. Sanctions would be weak and not easily enforceable. • Ineffective if there is a gap between public & private • interest. Education • • Uncertainty in outcome. Information • Effectiveness in using and Moral • information depends on the suasion bargaining power of the stakeholders. • • Stakeholders may lack capacity or incentive to use information • • Ineffective when a gap exists • between public and private interest. Source: Compiled from Montogmery 1972, Baumol and Oates 1988, Tietenberg 1995, OECD 1997, Stavins, R. N 2000; Sorell 2001 • • 14 Environment: Issues and Challenges in Thermal Power Generation P. R.

Shukla, IIM Ahmedabad There are strong theoretical arguments given by economists on the advantages of market-based instruments over command-and-control measures. Theoretically, market-based instruments minimize the aggregate cost of achieving a given level of environmental protection and provide dynamic incentives for the adoption and diffusion of cheaper and better control technologies. Despite these advantages, market-based instruments have been used far less frequently than command-and-control standards. They still remain in the fringes of environmental policy, and command-and-control measures dominate the environmental policymaking (Stavins 2000).

Each instrument has its own strengths and weaknesses and the appropriateness varies depending on the specificities of the environmental problem and the technical, economic or political situation in the country. Empirical evidence has shown that such a contextual approach is becoming more relevant in formulation of environmental policies (Glachant 2000). In this approach, the conceptual design of an instrument is just one factor influencing the choice of that instrument. The possibility of effective implementation in existing conditions is more crucial while making the choice. 15 Environment: Issues and Challenges in Thermal Power Generation P. R.

Shukla, IIM Ahmedabad 5. Emissions trading 5. 1 Emissions trading in the US The Acid Rain Program was established under Title IV of the 1990 Clean Air Act Amendments to achieve a major reduction in the electric generating facilities’ SO2 and NOx emissions through an emissions trading program. This cap-and-trade program in the US is considered as the most successful applications of a market-based instrument for environmental protection. The objective of the program with respect to the SO2 emissions was to reduce the emissions from electric utilities from the 1980 level of 17. 5 million tons of SO2 to a permanent level of 8. 95 million tons by 2010.

These reductions would be achieved through a two-phase tightening of the restrictions placed on fossil fuel-fired power plants. Phase I, beginning in 1995, included 110 dirtiest power utilities (263 units). Phase II, which began in 2000, tightened the annual limits on the large plants, and set restrictions on smaller, cleaner plants and all new plants. As of 2001, the program encompassed nearly 2,300 units at 1,000 plants. Annual caps are set, which would ultimately decline to a level of 8. 95 million allowances by 2010. Shares of this cap are distributed to the sources in the form of allowances in the beginning of the year, mainly based on their historical emissions, though a small portion is also sold in auctions and based on other performance criteria.

The phase wise division of the entire process enables power plants with low marginal abatement costs to bank unused allowances, thus deferring future abatement expenditure for a few more years with consequent, further cost savings. The flexibility provided by the Acid Rain Program enabled the units subject to the SO2 requirements to pursue a variety of compliance options. Sources met their SO2 reduction obligations by installing scrubbers, switching fuels, changing practices or procedures to improve energy efficiency, and buying allowances. The program created incentives to reduce emissions below allowable levels, spurring technological innovation and energy efficiency. In the 1990s, scrubber costs dropped by 40 percent, and the sulfur removal efficiencies of scrubbers improved from 90 to 95 percent. The emissions have reduced by more than 6. million tons from 1980 levels, measuring approximately 10. 6 million tons in 2001. In 2001, the sources achieved a total reduction in SO2 emissions of about 39% compared to 1980 levels. A robust market of bilateral SO2 permit trading has emerged, resulting in cost savings on the order of $1 billion annually, compared with the costs under command-and-control regulatory alternatives. This program also had positive human health impacts due to decreased local SO2 and particulate concentrations. Emissions trading program requires strong regulatory and administrative mechanism, and the success of the SO2 program is attributed largely to the strong monitoring and enforcements systems existing in the US.

This includes (costly) continuous emissions monitoring of all sources and on the enforcement side, the stiff penalties (much greater than the marginal cost of abatement) have provided sufficient incentives for the very high degree of compliance that has been achieved. 16 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 5. 2 Emissions trading in India Opportunities There is a good opportunity for an emissions trading mechanism in India for controlling SO2 emissions from the large point sources (LPS), especially the thermal power plants. Studies have indicated that the LPS in the energy sector contributed to 64% of the all-India SO2 emissions in 1995 and 82 power plants contributed a major chunk of 45% of all-India SO2 emissions.

These plants are widely distributed across the country since the power sector has grown around the state utilities. Moreover, the plants are characterized by differences in terms of performance, the quality of coal used, the thermal generation technologies, the efficiency of operations, maintenance, plant load factors, the age of the unit and so on. These differences would be reflected by differences in the marginal emission control costs for these plants. Since the mid 90s, policies are being adopted to control the SO2 emissions from the power plants. New technologies and measures to control emissions are being introduced through policy directives/ regulations.

Taking into consideration these directives as well as proposed directives for the future, an estimation of the business-as-usual scenario reveals that the SO2 emissions would increase to 2. 8 MT in 2010, 2. 9 MT in 2020 and would reduce to 2. 3 MT in 2035. The reduction would occur as a result of policy interventions that are bound to come for improving the quality of coal and using pollution control devices in the thermal power plants. While the policy directives on emission control technologies would bring about a reduction in SO2 emissions, they do not give the plants the flexibility to choose optimal solutions, thereby resulting in higher compliance costs. Developing an emissions trading regime to bring about the SO2 reductions could result in significant cost savings.

Since the marginal abatement costs varies across the plants, the plants with higher marginal abatement costs would have an option either to reduce emissions or to purchase allowances from the market, while those with lower abatement costs can sell their allowances. An emissions trading regime would also lead to investments in R&D to invent and commercialize new technologies, leading to technological developments. Moreover, an emissions trading program for SO2 emission reduction would bring in technologies, such as clean coal technologies that would use the abundant coal resources in the country. Alternate technologies like gas and renewables would be more cost-effective when a market for carbon emission develops.

Challenges Emissions trading program has to be implemented in coordination with local air quality regulations. This is because an emissions trading mechanism imposes a national cap, but no control on the local intensity of pollution. An emissions trading regime could create the hotspots, and worse, it could also lead to deterioration in the air quality of existing hotspots. Therefore, the local authorities in the hotspots areas have to enforce stricter regulations. An adequate institutional framework is crucial to the success of an emissions trading program. A regulatory authority is required to administer the entire program, beginning with the setting of the emission caps to monitoring the actual emissions from the plants.

Adequate infrastructure in terms of personnel, software’s are required for assessment and compliance and stiff penalties have to be enforced on defaulters. Yet another challenge to the development of an emissions trading market is the inherent inefficiencies of the energy and electricity markets in India. This implies that adopting measures that improve the economic efficiency of the emissions market need not necessarily be effective due to the inter-linkages with the energy and electricity markets. 17 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 6. Levelized Cost Analysis 6. 1 Levelized Cost Technologies compete on varied features. Cost is often the important parameter.

Levelized electricity cost represents the life cycle cost of generating a unit of electricity. It includes, for a technology, all relevant costs like investment, fuel cost, operations and maintenance. Levelised cost analysis of electricity generation is a vital comparative indicator for assessment of competitiveness of the technologies and their sensitivity to different parameters like changes in fuel prices and discount rates. Internalization of the environmental costs of different technologies in the Levelized cost assessment may lead to changes in the rankings of the technologies in terms of their relative competitiveness based on per unit generation cost.

The Levelized cost analysis is carried out with coal costs at the pithead and 1000 km away from the pithead. At the pithead, the average cost of Indian coal used for power generation is around Rs. 45/GJ+ with a heat value of 15 GJ/T (CMIE, 1999). At 1000 km away from the mine, the distance traveled on the average by the Indian coal, the cost doubles to about Rs. 90/GJ, assuming the transportation cost to be Rs. 700/T for 1000 km (IR, 1999). The sulphur content of Indian coal is low, about 0. 6 per cent and the ash content is high at about 45per cent. The cost of natural gas price is taken at prices of Rs. 150 per GJ (Shukla, 1997). Average biomass cost is assumed to Rs. 1000/T with a heat value of 15GJ/T (Ravindranath et al. , 1995).

Technology Coal Sub-cr PC Super-cr PC AFBC PFBC IGCC Table 6. 1: Technology characteristics Capital cost Efficiency (per Utilization (per O&M costs (Rs. cr/MW) cent) cent) (Rs. /kWh)* 4. 3 5 4. 5 5. 6 6. 7 35 37 33 40 45 70 70 70 70 70 0. 37 0. 48 1. 07 1. 19 1. 11 Gas Turbine 3. 1 38 25 0. 64 CCGT 3. 5 45 70 0. 34 Hydro 6 NA 50 0. 27 Nuclear 7 NA 70 0. 81 Other Renewables Small Hydro 5 NA 50 0. 2 Wind 4. 5 NA 20 0. 51 Biomass based 3. 3 33 50 0. 16 Solar PV 20 NA 20 1. 14 All cost figures are in 1998-99 prices. Source: WB, 1997; Shukla et al. , 1999 *This is based on fixed and variable O&M cost assumptions of the technologies mentioned in Appendix Table 4B.

The O&M cost figures here indicate the sum of both fixed and variable O&M costs. The fixed O&M costs (expressed in Rs. /kW in Appendix Table 4B) are converted to per unit generation costs based on the capacity utilization assumptions in this table. Levelized cost comparison for base load technologies is shown in Figure. For all technologies other than large hydro a capacity utilization factor of 70 percent is assumed, while for large hydro technology a capacity utilization of 50 percent is assumed. + All cost figures in this chapter are in 1998-99 prices 18 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Figure 6. : Levelised Cost Comparison of Base Load Technologies 3. 5 3. 0 Cost (Rs/kWh) 2. 5 2. 0 1. 5 1. 0 0. 5 0. 0 Sub-cr Sup-cr AFBC PFBC PC PC Capital IGCC CCGT Large Nuclear hydro O&M Fuel The Levelized cost comparison for base load technologies suggests that pulverized coal technologies and CCGT have comparable and low generation costs at the assumed fuel costs for coal and gas. Clean coal technologies, namely PFBC and IGCC are most expensive. Hydro is the cheapest, with generation cost about 12 percent lower than from conventional Sub-cr PC technology. Nuclear electricity costs thirteen percent above the conventional pulverized coal technology.

For coal technologies, capital cost contribution varies from about 25 to 40 percent. Capital cost contribution in advanced technologies like IGCC, having very high capital cost, is nearly 40 percent. The O&M costs of these technologies are also high, having a 40 percent contribution in the Levelized cost. The Levelized generation cost from very efficient clean coal technologies (like IGCC) is nearly 45 percent higher than that from conventional Sub-cr PC technology. Due to the low efficiency of the conventional technology, the fuel cost contribution is almost half of the total cost while in highly efficient advanced technologies it just makes up a quarter of the total cost.

Though the Levelized cost for CCGT is almost the same as that of Sub-cr PC technology cost, the fuel cost contribution for the gas based technology is much higher at 60 per cent of Levelized cost of CCGT. Therefore, the cost structure of CCGT is more sensitive to relative fuel price change compared to coal technologies. Levelized costs of base load technologies at different PLF levels are shown in Figure 3. 2. At present, the power purchasing agreements uses 68. 5 percent PLF as a benchmark for pricing. PLF improvement from 60 percent to 85 percent for Sub-cr and Super-cr PC technologies lowers the cost by 15 to 20 percent. Comparable cost savings for clean coal technologies are also 15 percent. CCGT costs are lowered by 12 percent.

For nuclear plants, the comparable cost reduction is 25 percent, which makes electricity generation using nuclear competitive with conventional coal technologies and CCGT at high PLF values. For conventional Sub-cr PC technology and CCGT, the generation cost reduces by about 7 percent as PLF rises from the 68. 5 percent benchmark to 80 percent. This, together with power purchase incentives, can be very profitable for plants operating at high PLFs. The variations in the relative performance of the technologies were observed under three levels of discount rates of 6, 8 and 10 percent. A 12 to 18 percent variation in the generation cost with discount rates ranging from 6 to 10 percent is observed for all coal and gas technologies.

But the large hydro generation cost exhibits a remarkably high variation of more than 60 percent with discount rate change. Nuclear generation cost shows a moderately high variation of 30 percent. 19 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Figure 6. 2: Sensitivity to PLF 3. 5 3. 0 2. 5 2. 0 1. 5 60% Cost (Rs/kWh) 65% Sub-cr PC IGCC 70% PLF 75% Sup-cr PC CCGT 80% PFBC 85% Nuclear Figure 6. 3: Levelised cost sensitivity to discount rates 3. 5 3. 0 Cost (Rs/kWh) 2. 5 2. 0 1. 5 1. 0 Sub-cr Sup-cr AFBC PC PC 6% PFBC IGCC CCGT Large Nuclear hydro 10% 8% Large hydro technologies are extremely competitive at a low discount rate of 6 percent.

At this rate, the Levelized cost of generation using large hydro is about 25 percent less than generation cost using conventional coal and gas technology. The generation costs of nuclear also come very close to the costs of conventional coal and gas technologies at low discount rates. Therefore, lowering of the discount rates with economic reforms will greatly improve the competitiveness of these technologies. 20 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 6. 2 Emissions from Power Generation and internalization of environmental costs Emission loads from a power plant vary according to the technology and the type of fuel used.

Environmental impacts of some clean coal technologies like Fluidized Bed Combustion and Integrated Gasification Combined Cycle are less than the conventional ones like Sub-cr PC. A large fraction of the present emissions from electric power generation originate from a relatively small number of large sized electric power plants. An analysis of the point source emitters for gases like C02 and S02 was carried out from electric power generation by taking into account the annual emissions from 94 thermal power plants using coal and natural gas as fuel. The analysis revealed that around forty percent of the total C02 and S02 emissions from electric power generation originate from just ten thermal power plants.

This makes the implementation of emission control measures relatively easier as targeting the top few emitters will help in control of a large fraction of the emission load. The cost for control of SO2 emissions using technologies like Flue Gas Desulphurization (FGD) process translates into 300$ per ton of SO2 cost. FGD installation leads to about 12 percent increase in the capital cost of a Sub-cr PC plant (WB, 1997). Control of NOX emissions using control technologies like Low NOX burners (LNB) translate to a cost of about 550$ per ton of NOX (WB, 1997). The analysis here assumes carbon tax of 25$/ton of carbon, SO2 tax at 300$ per ton and NOX tax at $550 per ton.

Table 6. 2 shows environmental costs of coal and natural gas based technologies under these assumptions. The carbon tax adds maximum environmental cost per unit of electricity for all technologies. Costs of SO2 and NOX are relatively low. Pulverized coal technologies have environmental costs that are three times that of CCGT and twice that of clean coal technologies. Table 6. 2 Environmental cost implications on coal and gas based technologies (Rs/kWh) Sub-cr PC Super-cr PC PFBC IGCC CCGT Carbon ($25/ ton) 0. 26 0. 25 0. 22 0. 2 0. 14 SO2 (300$/ton) 0. 11 0. 11 0. 007 0. 004 NOX (550$/ton) 0. 08 0. 07 0. 017 0 0. 01 Total Environmental Cost 0. 45 0. 3 0. 25 0. 20 0. 15 The relative Levelized costs vary significantly across technologies if environmental costs are internalized. For the conventional Sub-cr PC technology, internalization of the environmental costs increases the generation cost by one-fifth. The impact is less for clean coal technologies. In the case of IGCC, for example, the increase in generation cost is only by 8 percent when the environmental costs are internalized. For gas technology, increase in generation cost caused mainly by carbon tax imposition, is 7 percent. In case of hydro plants, the environmental and social impacts arise from factors other than air pollutants.

If these external costs are approximated to amount to ten percent of project cost, internalization of these costs adds 8 percent to the Levelized cost of hydropower generation. In case of nuclear plants, environmental costs are internalized by assuming a 15 percent burden over the capital cost. This translates into 9 percent rise in the Levelized cost of nuclear generated electricity. Figure 6. 4 shows a comparison of the Levelized costs of different technologies with and without internalization of environmental costs. The top section of each bar in the figure represents the environmental costs. 21 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad Figure 6. 4: Levelised Costs with Environmental costs 3. 5 3. 0 Cost (Rs/kWh) 2. 5 2. 0 1. 5 1. 0 0. 5 0. Sub-cr PC Sup-cr PC PFBC IGCC CCGT Large hydro Nuclear Lev cost Env cost Environmental costs change the relative ranking of technologies in terms of costs. When environmental costs are internalized, gas technologies become more competitive than coal technologies. Cost of CCGT falls to level below that of conventional sub-critical pulverized coal technology. Hydro continues to remain the cheapest source. However, the analysis here did not include internalization of the environmental impacts due to coal mining and transportation costs associated with natural gas transportation and the associated risks. 22 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 7.

Impact on the Environment The Clean Development Mechanism (CDM) under Article 12 of the Kyoto protocol allows annex 1 countries to meet their emission targets through greenhouse gas (GHG) emission reduction/sequestration projects in non-annex 1 countries. According to the Kyoto Protocol, for CDM to be effective, it must meet several criteria. The creditable emission reductions must be “real, measurable, and long term”. In addition, the rule of additionality requires a baseline estimate that represents estimated emissions reduction that would have occurred in the absence of CDM. Case studies concerning the influence of the power sector reforms on technology, efficiency and emissions were carried out in the states of Gujarat and Andhra Pradesh.

The study methodology included two sets of questionnaire surveys and interviews with the plant manager and senior executives of the electricity utilities as well as subject matter experts. The data collected provides carbon intensities from 1990 to 2001. Use of carbon intensities as a basis for calculation of the baseline has found favor with several researchers (Bosi, 2000 and Zhang, May, Heller, 2001). Hence, carbon intensities are assumed to be indicators of the baseline in this study. The data provides four points on the baseline for the electricity sector of Gujarat from 1990 to 2001. The average baseline takes into account the emissions from the existing stock. The marginal baseline has been constructed based on the additional capacities after 1990. Figure 8. : Carbon Baseline for electricity industry Gujarat 0. 40 Lignite 0. 30 kg (C)/KW h LSHS Coal Average Thermal Overall M arginal Gas/Naphtha 0. 10 0. 10 0. 30 0. 40 Andhra Pradesh 0. 20 0. 20 Coal Average Thermal Marginal Overall Gas 0. 00 1990 1994 1998 2002 0. 00 1990 1994 1998 2002 A reduction from 0. 25 to 0. 19 million tons of carbon per TWh has been achieved in the last 11 years from 1990 to 2001 in Gujarat. This has been chiefly due to the increased capacity growth of gas and naphtha based plants. Though the growth of lignite-based plants has also been projected, its impact on the baseline is not expected to be much due to dominance of gas and coal based technologies.

In addition, new lignite plants are coming up with improved technology and higher efficiency. Considerable differences in marginal and average baselines exist because of the recently installed and improved technologies, which use mainly gas or naphtha. The marginal curve shows an increasing trend after 2001 due to the establishment of a lignite plant by the cooperative sector. In the last 11 years from 1990 to 2001, the carbon intensity has increased from 0. 17 to 0. 20 kg of carbon per KWh in Andhra Pradesh. This has been chiefly due to the decreasing generation from hydro plants. The contributions from hydro plants have decreased from 39 percent of the total generation in 1990 to only 12 percent in 2001. 23

Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad The carbon intensity in Gujarat was a little below 0. 20 million tons of carbon per TWh in 1998. It was a little above 0. 20 million tons of carbon per TWh in 1998 for the state of Andhra Pradesh. The comparable figure in China was 0. 24 million tons of carbon per TWh in 1998 and that in US was 0. 16-0. 17 million tons of carbon per TWh. Most of the countries, which had lower intensities, had a considerable portion of their generation from clean sources like hydro, gas, renewable and nuclear. In 1998, the US had 45 percent of their generation from such sources.

China had 27 percent of its generation and Gujarat had over 30 percent of its generation from these sources (including both state and federal generation), which partly explain the difference between the Indian and Chinese baselines. In case of SO2, the baseline for Gujarat has declined much more rapidly than that of AP. One of the chief causes is the high penetration of gas technologies in Gujarat which emit negligible amounts of SO2. Figure 8. 2: SO2 Baseline for electricity industry 9 g (SO2)/KWh 6 Thermal (AP) Overall (AP) Thermal (Gujarat) Overall (Gujarat) 3 0 1990 1994 1998 2002 24 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad 8. Conclusion Power is a critical infrastructure for economic development and improving the quality of life.

For this reason, power has been given due importance by the policy makers of India since independence. However, unlike in the past, the environment has been introduced as one more factor in this sector in the recent years. Keeping the environment in perspective of the development of the sector, this paper has a number of conclusions. First, the CO2 emission from large point sources continue to increase and SO2 emissions is projected to decrease. The reduction in SO2 emissions would be further strengthened by another recent policy decision on mandatory washing of coal that is used 700 Km away from the mine mouth. This measure is aimed at reducing fly ash and also simultaneously reduces some sulfur.

This reduction of SO2 emissions further indicates that the disjoint between the GHG and local pollutant emissions, discussed earlier, is unfolding gradually in India. Second, the largest 50 large point sources of emissions, which are mainly power plants, contribute almost 50% of all India emissions. Though there has been rapid penetration of natural gas technologies, coal are still projected to have a substantial share in electricity generation in India. In these circumstances, it may be easier to control these few large emitters and stricter regulation and enforcement may be imposed. Third, the environmental regulations in India are mostly of the command and control type.

With the opening up of the economy, there might be a shift to economic or market based regulatory instruments. One of the possibilities that are expected to evolve is emission trading mechanisms. The power plants are characterized by differences in terms of performance, the quality of coal used, the thermal generation technologies, the efficiency of operations, maintenance, plant load factors, the age of the unit and so on. These differences would be giving rise to different emission levels and costs for control of the same. If annual emission caps are imposed, this would aid plants which are more environmentally efficient. Fourth, environmental costs change the relative ranking of technologies in terms of costs.

When environmental costs are internalized, gas technologies become more competitive than coal technologies. Cost of CCGT falls to level below that of conventional sub-critical pulverized coal technology. Hydro continues to remain the cheapest source. Finally, the case studies of the states of Gujarat and Andhra Pradesh show that energy efficiencies have been improving after the initiation of the reforms. This has been mainly due to the penetration of natural gas, use of washed and imported coal, and investments in renovation and modernization projects. The improved energy efficiency of generation has resulted in the intensity of carbon emissions to follow a declining trend.

Assuming the carbon intensity to indicate the baseline, the states show a downward sloping baseline for thermal plants. The difference between the average and marginal baselines indicate that a major portion of the emissions come from older plants. Retirement of old plants and installation of new capacities has further scope for driving down the baseline. 25 Environment: Issues and Challenges in Thermal Power Generation P. R. Shukla, IIM Ahmedabad References AIM Project Team (2002) AIM-Local: a user’s guide. AIM interim paper, IP-02-01. National Institute for Environmental Studies, Tsukuba Berger, C. , Haurie, A. and Loulou, R. , 1987. Modeling Long Range Energy Technology Choices: The MARKAL Approach. Report, GERAD, Montreal, Canada.

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