Powering India: how to increase the amount of CHP and DE

India is already well served by ‘captive’ on-site power plants at individual industrial sites, but the country also suffers from widespread energy shortages. Here, Pinaki Bhadury suggests new policy measures which would ensure that decentralized energy would be a major part of any new generating capacity.

Pinaki Bhadury

Distributed energy (DE) made debut in India more than 100 years ago in 1899 when Calcutta Electric Supply Company set up the first 1 MW power plant for the supply of electricity to the city of Calcutta. Bombay (now Mumbai) and other big cities soon followed suit. However, the growth of small towns into cities saw the emergence of large centralized power plants, which slowly replaced DE plants.

But thanks to rising shortages in power supply and an inadequate distribution network, DE has re-entered the country in the form of ‘captive power plants’. Captive power plants are set up and owned by individual industrial sites primarily for their own use on-site and the energy produced is not meant for sale to others. Today, out of an installed capacity of 149,000 MW, about 15% of the capacity lies in captive power plants (see Figure 1).

Drivers for DE in India

The growth of DE in India has been driven by an increasing demand-supply gap, unavailability and poor reliability of power, high cost of power, and a poor and insufficient transmission and distribution (T&D) network.

Figure 1. Source of electricity generation in India
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Inadequate addition of new capacity and its poor implementation have created the huge demand-supply gap (see Figure 2). If India is to achieve an economic growth rate and size comparable to that of China, then present estimates of electricity demand will fall woefully short of actual demand and India will have to treble its installed capacity by 2017 (see Figures 1 and 3). Peak power shortages have been continuing at 12% of installed capacity and energy supply shortages at 7% (based on operational supply and actual consumption) for the past five years with no signs of any improvement.

As if inadequate supply was not enough, India’s T&D network is archaic, resulting in high losses, poor reliability and poor quality of supply. T&D losses – renamed Aggregate Technical and Commercial (ATC) losses, which also account for the theft of electricity – are 39% on average nationally. Thus for every 1000 kW generated, 390 kW is lost. Meanwhile, grid frequencies vary widely, between 48.5 Hz and 51.5 Hz.

Figure 2. Electricity demand-supply gap
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While no measurements have been made on the resulting damages to electrical equipment on account of these variations, users of captive power plants, who enjoy a steady supply frequency, have reported a 20% reduction in their annual electrical maintenance costs.

Figure 3. Projected electricity demand
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Many Indian villages do not have sufficient electrical wires to connect to individual homes. Some of the remote villages, such as those in the north-eastern states which are covered by thick forests or the town of Leh in the Himalayan state of Ladakh, do not have grid access at all.

To increase the efficiency of the T&D system, the Indian Government launched in March 2003 the Accelerated Power Development and Reform Program (APDRP) which aims to reduce T&D losses and increase and strengthen distribution lines. This US$4.2 billion programme has received about 50% support towards its budget, but it will hardly meet the requirements and the progress is very slow.


Captive power plants
Frustrated by the unavailability of supply, industries have been installing diesel engine, gas turbine or steam turbine-based captive power plants in their factories, often generating power at lower cost than the grid. An industrial user in India pays one of the highest prices for electricity in the world, often at 10-11 US cents per kWh.

Besides the growth of industrial clusters, the IT boom has increased power demand on a scale unforeseen by national planners. This is because these industries actually consume more power than traditional industries – as they work 24 hours a day, 7 days a week, and 365 days a year.

Industries such as cement, steel, fertilizer and textiles are increasingly dependent on their own captive power plants. And with the rapid growth of these industrial sectors, electricity demand is booming. The current installed capacity of captive power plants in India is estimated by some at 27,000 MW, while others put an even higher figure of 40,000 MW – that’s 40% of India’s installed capacity.

It is estimated that in the next five years about 12,000 MW of captive power would be added. This figure, in my opinion, is very conservative and, going by past trends and current supply scenario, is likely to almost double.

Rural electrification

Sixty percent (about 660 million) of India’s population live in rural areas consisting some 630,000 villages and towns. Of these, 44% have no access to electricity. To address this problem, the Indian Government has declared a programme called ‘Mission 2012 – power for all’. In order to electrify 100,000 villages and 10 million households, the Planning Commission of India estimates that 100,000 MW will need to be added by 2012. This is based on the assumption that each household will consume 1 kWh of electricity per day, which is very conservative when compared to an urban household that consumes an average of 12-13 kWh per day. If rural household activities were to increase to one-fourth of an urban household’s, the demand would actually be four times 100,000 MW. Experience has shown that the demand for electricity and energy keeps increasing as economic activity increases.

To address the huge demand, the Government launched a large scheme a few years ago for capacity addition based on a centralized power generation model, where power stations will be set up at the fuel source such as coal pitheads, LNG regasification plants, large rivers and nuclear power plant. This five-year plan, ending in the fiscal year March 2007 and the 10th of a number of such plans, had envisaged a capacity addition of 41,000 MW which was trimmed down to 34,000 MW. It is now apparent that even this target will not be met and the shortage will be at least 20%. The 11th plan (2007-2012) envisages capacity addition of 73,000 MW, and by the year 2032 the Planning Commission estimates that India would need 960,000 MW of capacity. With such a poor implementation record, these figures look impossible.

Realizing that this massive task cannot be met by its own investment alone, the central government enacted the Electricity Act 2003 (EA2003) in June 2003. This has created a favourable atmosphere for distributed electricity generation by de-licensing power generation and allowing captive power plants to sell any excess capacity either to the grid or the third party directly. It also allows co-operative power plants to be set up by a group of consumers for their own consumption using any type of energy resource available locally.

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This Act has recently been facilitating the growth of distributed energy generation in India. In addition, the ‘Integrated Energy Policy for India 2006’, recently established by the Planning Commission, recommends the use of distributed energy such as captive power generation; on-site generation using local resources such as solar, hydro, biomass for villages, cogeneration for industries; and trigeneration plants for buildings and commercial complexes.

Obstacles to DE in India

Mind-set of energy planners – ‘the bigger the better’
Indian energy planners and regulatory authorities have favoured large-sized power plants as big as 4000 MW at a single location using either coal or gas, arguing that economies of scale bring down the cost of generation that no other types of plant can compete with. True, the cost of generation is low for very large plants, but what about the cost of transmission and the related risks? The Ministry of Power estimates that the cost of transmission for every megawatt of power is as much as that for generating the power alone, if not higher. Taking into account the present T&D losses, the cost of this power is actually higher than the cost of a mid-sized plant located near the point of use. Besides, how will this power reach the users if the transmission capacity is inadequate or does not exist?

Still, any suggestions for policy planners and regulators to adopt decentralized distributed generation have been met with responses like ‘they are sub-optimal’ or ‘they are inefficient energy guzzlers’.


Though the EA 2003 has facilitated the promotion of DE in India, there is a lack of planned support by the local governments. While the policy was made by the central government, actual policy implementation lies with the Ministry of Power and the state governments. This is the source of the problem.

Most of the states do not allow captive power plants and distributed generators to sell excess power directly to third parties. In fact, the Supreme Court recently ruled in favour of a utility company on this matter on the grounds that the captive/decentralized power plant must have a distribution licence. Obtaining such a licence is a long and cumbersome process, and this is a deterrent for decentralized generators to set up additional capacity for distribution to others.

Financial constraints

Strangely, in India one gets penalized for efficiently generating electricity. A CHP plant, no matter its size, attracts unrealistic taxes and duties that are not applicable to large power plants. Also, DE plants and machinery attract additional import duties and other levies that are waived for large power plants (see Table 1). Even sales tax (VAT, or value-added tax) is levied on raw material inputs (such as fuel and lubricants) whereas it is not applicable for mega power plants.

A 40 MW captive power plant for an Indian chemicals factory. India may add as much as 12,000 MW of captive power capacity over the next five years
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Similarly, the levy of a ‘cross-subsidiary’ charge on the power sold to the grid or third party, which can be as high as US$0.40-$0.50 per kWh, has not enabled distributed energy to compete with grid power. This has been one of the main contentious issues that are being debated in every Indian state. But due to support by both state and central governments on the grounds of subsidizing electricity supply to population below the poverty line, regulators are refusing to remove this charge. Recently, however, a regulator in a western state has agreed to waive this charge provided that the energy sold to the third party cannot be supplied by the contracted distribution company.

Fuel supply constraints

India is facing a severe constraint on fuel supply. Though it has the world’s fourth largest reserve of coal and is one of the top producers of coal, supply is not enough to meet its need. Rising cost of fuel oil has pushed people to look for alternative resources to natural gas and coal. With natural gas in short supply (70% of it being imported) and expensive, the demand for coal has been burgeoning. The country presently faces a coal supply shortage of 35 million tonnes per year.

Inadequate infrastructure

Added to the supply difficulty is the fact that the Indian railway system – albeit one of the largest rail networks in the world – does not have enough tracks and wagons to transport the required quantities; also there are not enough ports to import such quantities.

A 27.5 MW gas turbine-based cogeneration plant for a textile mill in India. The cost of cogenerated power can actually be lower than large centralized power
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There is a lack of a sufficient and proper gas distribution grid, which is putting severe constraints on gas availability and its use for DE. Gas is available only in certain parts of the country, in the western state of Gujarat and a small area on the eastern coast where there is little economic activity.

The cost of coal transportation is very high in India – $25 per tonne as compared to pithead cost of $18 per tonne – making the use of this fuel very expensive.

Way forward – what needs to be done in India for DE

Given the grim background of India’s energy scenario, its constraints and problems, the country badly needs to look proactively at DE as a viable option to quickly meet its burgeoning electricity needs. It has to be done now, or else it will be too late.

Need to influence policymakers about DE advantages

As a first step towards this goal, I think we should study India’s energy needs from all perspectives – demand, rural electrification, industrial growth, clusters of demand centres, environmental issues, and fuels available locally including biomass and other resources such as solar, wind, hydro – and work out an energy masterplan for India for the next 20 years. This study should include a mix of central as well as decentralized energy generation so as to achieve the goal of ‘power for all by 2012’, which will be reliable, affordable, and available on demand at any time. I suggest that we run the WADE Economic Model for India – maybe for a state to start with instead of the entire country, and share the results with policymakers, regulators, project planners, and utility companies so that DE is given the same status as large power plants. (For more information on the WADE Economic Model, see article on p.88.)

The Integrated Energy Plan of India could be the starting point for this study, and through various agencies – government, private, NGOs – a study can be conducted to find out the right mix of generation model for India so that its people get quality power at all times at a reasonable cost. Should the WADE model come out in favour of DE (I am confident it will), the Indian Government should then prescribe a percentage of DE in a state’s energy generation capacity to be achieved by a certain time, after which the utility company would have to pay a tax for non-compliance – the same way it is levied for renewable energy.

To ensure compliance, there should be a decentralized energy department under the Ministry of Power and in each state headed by a senior official with substantial power. This official should also be the single point of contact for all matters related to DE. Future policy should remove discriminatory taxes and duties for DE and create a level playing field for both large and decentralized generation models.

There is a strong need then to create an awareness of DE amongst state policymakers, regulators, NGOs, villagers and the general public so they will buy the DE concept. This should be done through seminars, camps, demonstration projects and effective promotion.

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Pinaki Bhadury is the Head of Business Analysis and Research Services, Thermax Limited, Pune, India.
e-mail: pbhadury@thermaxindia.com

The views expressed in this article are the author’s own and does not reflect the views of his company.

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