The Indian Biomass Power Sector – Part 1

by Jai Rathod

In the first of a two-part blog piece, Ritesh Pothan’s colleague, Jai Rathod, takes a look at the milestones reached by India’s biomass sector. Jai reports that India’s biomass industry faces a number of challenges, but concludes that “in adversity lies opportunity”. The second installment of this piece will cover these exciting opportunities.

The Indian biomass sector (part 1) - The story thus farThe need for a low carbon economy has now been more or less accepted by even the most ardent skeptics of climate change induced by greenhouse gas emissions. Let’s evaluate then the current status of the various sources of renewable energy. Hydro power has proved to be viable and cost competitive and hence we will not consider it for the purposes of this comparison. The case for wind power has been strong for years and, helped by government policies, it has resulted in 43,000 MW being added worldwide in 2011. As can be seen below, the wind sector has shown strong growth since 2001 with the worldwide installed capacity growing more than 10 times in 11 years and now standing at an impressive 2,39,000 MW. India’s share in this has been a healthy 13,000+ MW.

World wind

Source: World Wind Energy Association

Solar power especially photovoltaic or PV has also shown fast growth in recent times. Solar power generating capacity grew by 73% or 16,700 MW in 2010, picking up the pace again after a brief slowdown in 2009, to reach 40,000 MW worldwide, more than double the 2008 level. Capacity growth has averaged 39% pa over the past 10 years. With 17,300 MW of capacity installed by the end of 2010 Germany has 43.5% of the world’s solar capacity, more than four times its nearest rival Spain (3900 MW).

India has insignificant numbers at present but is poised for rapid growth over the next 10 years with many (yours truly included) of the opinion that the government’s target for solar generation of 20,000 MW – through the National Solar Mission – by 2022 could well be achieved before time if current trends of price reductions continue.

World biomass

(Source: British Petroleum)

The global installed capacity for Biomass power and heat stood at 62,000 MW in 2010. According to the MNRE (Ministry for New and Renewable Energy in India), India’s share stood at 2665 MW with the bulk of it (1666 MW) coming from sugarcane bagasse co-generation projects and only 999 MW coming from biomass power plants.

Biomass cap India

Source: MNRE

If you compare the new capacity added each year with the previous year, its clear that there hasn’t been any sort of explosive growth in this sector. When you consider that the total numbers include cogeneration capacity as well which forms the bulk of new capacity addition, then the numbers for standalone biomass power plants look even more disturbing.

While solar and wind have found favour with investors, the biomass sector has failed to evoke the same kind of attention from private developers in India esp. of late. This is surprising as India has a large agrarian economy which generates some 500 Mn. metric tons of biomass each year. MNRE studies have itself found surplus biomass availability of 120-150 Mn. metric tons per annum which should be theoretically sufficient to generate around 18,000 MW of “green” biomass power in addition to the 5000 MW that can be generated utilizing the waste bagasse from the country’s 550+ sugar mills. Apart from this, attractive capital subsidies are available through the MNRE as also 80% accelerated depreciation in the 1st year, 10 years’ income tax holiday, concessional customs and excise duty on plant and machinery as well as general sales tax exemption in certain states.

Of course, theory doesn’t always translate into practice. Let’s analyse why. A few years back, a lot of the agricultural waste such as rice husk etc. was burnt regularly in the open fields as a means of disposal by the farmers. This biomass residue or waste was unwanted, had no takers and occupied valuable farmland space that had to be freed up for the next crop cycle. Burning was the only cheap solution. This was a golden opportunity which was picked up by budding biomass power plant entrepreneurs. They started setting up projects utilizing this waste and farmers were now being paid Rs. 400-800 per ton for this very waste – something the farmers would have given away for free till not-so-long ago. It was an ideal win-win situation. The farmers were able to generate an additional source of revenue whereas the power plant developers could get access to a fuel that was cheaper than coal. And they lived happily ever after. Well, not quite.

With prices of fossil fuels skyrocketing during the commodity bull run leading upto 2008, industries using large quantities of these fuels for steam generation and process heat were severely affected by these higher input costs. Cheap oil was no longer a reality and users of liquid fuels such as Furnace Oil, LDO, etc. were paying almost 100% more for the same quantities than what they had been used to. This led to the search for cheaper alternatives and the most obvious and low-hanging fruit was agri biomass waste. The economics were compelling too. Approx. 4-5 kg. of biomass produces the same thermal energy as 1 litre of furnace oil. Even assuming the cost of biomass is Rs. 4 per kg, it would mean an outgo of Rs. 20 as against Rs. 40+ which is the current per litre price of furnace oil – with both fuels producing the same energy. This huge savings means that the cost of retrofitting the boilers to run on dual fuel – biomass and furnace oil – is recovered in less than 2 years – a fantastic payback period by any yardstick. Whle this was great news for certain industries located near sources of agri waste, it had a devastating impact on biomass power plants as they could not afford to pay such high prices for feedstock.

Most biomass power plants were set up with the State Electricity Board as the primary offtaker of the power produced. These power purchase agreements (PPA’s) had a pre-determined tariff rate along with an escalation clause that allowed gradual increases in the rate of electricity purchased from biomass power plants. However, when biomass prices shot up from the originally envisaged Rs. 600 / ton to as high as Rs. 3000 / ton in most pockets today, all profitability calculations were thrown out of the window. This was an increase of 400% in a very short span of a few years – something that neither the government nor the power plant developers had bargained for. The developers just could not compete in the open market with industries which were using this biomass for a completely different purpose – generation of heat, not power. It is very well known that the same fuel will produce vastly varying technology efficiency levels depending upon the end use. If the end use desired is heat then overall efficiencies could be in the range of 65% whereas if the end use is power then the efficiency drops to as low as 25-30% due to the additional conversion process of heat to electricity.

Considering the seasonal unavailability of biomass, the government had allowed biomass power plants a maximum fuel mix ratio of 75:25 i.e. 75% biomass and 25% coal could be used to feed the plant. However, with their primary feedstock not viable anymore, some developers started using significantly more quantities of coal than biomass (in some cases as high as 90% coal), thereby defeating the whole purpose of reducing CO2 emissions. No doubt, the pressure to repay huge loans from financial institutions would have also played a role in their decision. The debt component (at 70% of project cost) of even a small 2 MW project would be between Rs. 7-10 Crores – hardly a small sum in this context. It must also be remembered that quite a few of these developers are small-ish companies which lack the financial strength to simply write off their biomass power plant foray as a “misadventure”. The inability to set up large biomass power projects due to the non-availability of large quantities of biomass at a single location meant that most of the larger players had stayed away from this sector leaving room for small private entrepreneurs (weaker hands) to take their place.

This has also resulted in hectic lobbying by the industry to get the state governments to increase the biomass power tariffs from the current ones which are already in a reasonably high bracket of between Rs. 4-5 per kilowatt hour or unit of electricity (see table below).

Summary of biomass power and cogeneration tariffs across states (as on 31.03.2011)

Biomass tariffs

Source: MNRE

As we can see, biomass power tariff rates are already quite attractive compared to hydro, wind and thermal power plants whose tariffs range from Rs. 2.5 – 3.5 per kilowatt hour (kWh) on average. Of course, one can surely understand the need to find a solution for developers who have already put up plants with heavy capital expenditure and they deserve to at least make a reasonable return on their investments. However, to increase tariff rates even higher to Rs. 6-7 is also not sustainable in the long run and would put further pressure on state discoms (distribution companies) already reeling under accumulated losses of approx. Rs. 80,000 Crores across the country. Exceptions can be made for plants already commissioned on a selective basis after studying each project.

One thing is for certain – the older model of biomass aggregation from surrounding areas without any long term supply contract in place at a reasonable price is surely a thing of the past for biomass power projects of any decent size. It could work for smaller plants or where the local community is made a stakeholder in the project with direct benefits accruing to them in the form of good quality, consistent, baseload power supply. This incentivizes the supply chain to not break away and cater simply to the highest bidder in the market.

So is the biomass story in India over? Far from it. In adversity lies opportunity and I will be covering these exciting opportunities in Part 2 of this series titled “Captive Biomass Plantations – The key to exponential growth of Biomass Power in India”. Watch this space for more.

Editor’s note: Jai Rathod is a founding member of Natural Energy Solutions Pvt Ltd based in Mumbai (India) which focuses on creating innovative and profitable business models within the Indian energy space.

You can reach him at jai@natgrp.net and the organization’s forums at Renewable Energy and Cleantech Forum – India as well as Solar Energy Professionals – India


About Ritesh Pothan

Ritesh Pothan, is an accomplished speaker and visionary in the Solar Energy space in India. Ritesh is from an Engineering Background with a Master’s Degree in Technology and had spent more than a decade as the Infrastructure Head for a public limited company with the last 9 years dedicated to Solar and Renewable Energy. He also runs the 2 largest India focused renewable energy groups on LinkedIn - Solar - India and Renewables - India
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