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Solar energy is not only becoming a problem for existing fossil fuel plants with its ever decreasing prices (already fallen below that of coal in India), but also plans for new coal power plants. The power industry has worked on the business model of long-term power purchase contracts (PPAs) of 25 years for a very long time. As building a new power plant (coal, gas, hydro, nuclear) requires a lot of capital expenditure and money (half a billion to a billion dollars), the developers need to hedge their risks by ensuring that the power generated is sold to customers.
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The cash flow security is needed to ensure that the plant owners get debt from banks which finances 70-80% of the power plant cost. This has been the industry model in which long-term contracts account for a lion’s share of the overall market. But with solar prices falling every year by 10-20%, this model has come unstuck. Power buyers are suffering from huge losses in locking themselves in long-term contracts. If they sign a power contract for INR x for 25 years and the power price falls to INR y the next year, then they suffer from a loss of 24 X (x-y) which is huge in absolute terms. This is the reason why discoms in India have become reluctant in signing PPAs with not only coal power plants but also some of the older solar and wind power plants which they had tendered for.
Storage is another bogey which is hitting the conventional power industry with solar plus storage set to become cheaper than grid prices. With customers able to receive solar plus storage at a cheaper price, the distribution utility will have no one to sell their power, for which they had signed long-term contracts. This is another huge danger facing the power industry. As a result of these trends, the power industry has fallen into a fund with not many people willing to put up a new coal power plant anymore. Even solar plus grid scale storage might become much cheaper going forward given the falling prices of lithium batteries. They will directly compete with large coal power plants in the wholesale market. Also with environmental and global warming concerns growing, coal suffers from the stigma of being one of the dirtiest fuels. Some countries such as UK, Canada, France and others have decided to shut all their coal plant capacity over the next 10-15 years.
1 Comment
This is very good development. Economies and governments should only encourage transition to clean sources of energy. However, even though it appears to be happening on a pretty large scale lately, I have read a grave report on keeping global temperature below 2 degrees – it claimed that based on the progress made by now in reducing CO2 emissions, we will most likely not achieve the goals.