India's Dilution Of Emission Rules Sparks Industry Uncertainty

India had been trying to reduce sulphur emissions from its coal-fired power plants, at least on paper, since 2015. Flue Gas Desulphurisation (FGD) was mandated by the government to curb air pollution. But a decade later, a new government notification quietly relaxed the norms for the majority of power units in India.

The notification issued in July has put a question mark on the FGD solutions industry, left capital goods companies in limbo, and environmental experts questioning why power plants are being let off the hook.

Thermax Global, an energy solutions company that also provides FGD solutions, perhaps saw this coming. In May, its executives had remarked that the FGD segment had gotten messy.

The current relaxation makes the situation messier. In the days after the announcement, state-run NTPC, according to sources, wrote to its equipment contractor BHEL to hold the execution of FGD units for some of the power plants. Industry executives said that NTPC, India’s largest power producer, is a trend-setter for the sector, anticipating more ‘hold’ directives to follow.

An email query sent to Adani Power, Tata Power, JSW Energy and NTPC on plans for their underway FGD orders placed for their power units remained unanswered. The Core will update this story as and when we receive a response.

The government notification also comes at a time when India has been turning to its coal-fired power plants to meet higher power demands.

A Decade of Unravelling

FGD systems — which remove sulphur dioxide from power plant emissions — were first mandated in India in December 2015. The Ministry of Environment & Forests (MoEF) introduced stricter sulphur emission norms to reduce particulate matter and harmful gases in the air near thermal power plants.

India’s coal-fired power plants were required to install FGD systems, making it “a major market for FGDs in the world,” noted a retired executive from the capital goods industry. The timeline for implementation was by 2017.

Since then, there have been multiple extensions — to 2022 and then 2025 onwards — finally culminating in the latest relaxation. The July 11 notification relaxed sulphur emission norms for most power plants, estimated at nearly 80% of the coal-fired capacity.

The mandate had initially triggered a flurry of activity in the industry, creating a market as big as 100 gigawatt (GW) of FGD systems. By December 2024, about 102.04 GW of power plants had FGD-related contracts either awarded or under implementation, according to rating agency CareEdge estimates. At an estimated Rs 0.6-0.8 crore per megawatt (MW), this translated to a potential Rs 60,000 to 80,000 crore market. The fate of these projects now hangs in the balance.

Thermax executives summed up India’s FGD trajectory succinctly in May, saying, “The entire FGD space itself went through a high, and then instead of going to newer highs, has come down.”

As of today, only 22,000 MW of India’s coal-fired power capacity has the pollution curbing system in place. This is against 200 GW+ for more than 500 thermal power units.

Aside from repeated timeline extensions, execution challenges and delays, complexity of the project, financing woes and lack of transparency in cost recovery through tariffs all contributed to its bumpy journey.

Loss Or Win?

On the face of it, the government’s move is being celebrated. Setting up FGD systems is capital-intensive. Now it could help power generators avoid annual tariff expenses anywhere between Rs 19,000 crore and Rs 24,000 crore, typically passed ahead as electricity tariffs, according to CareEdge estimates.

However, before its undoing, the decade-old regulation created an entire capital goods supply chain — from big equipment manufacturing companies like BHEL and L&T to small vendors supplying pumps and other ancillaries.

“India’s relaxation of FGD mandates, exempting 79% of thermal power plants, has slashed the market size from Rs 2.45 lakh crore to Rs 51,448 crore, with a reliable residual market of just Rs 26,340 crore,” said Arun Kailasan, research analyst at Geojit Investment and added “This poses a major setback for capital goods firms like BHEL and Larsen & Toubro (L&T), which have invested heavily in FGD technology… the short-term outlook for FGD equipment manufacturers is negative, with market consolidation likely."

Not just large equipment makers, there is a complex web of local ancillary vendors and foreign suppliers, as the FGD technology also involves an import component. Cancellation of orders poses the risk of arbitrations across the supply chain for any vendor orders already placed.

“Certainly, there are going to be litigations for any orders that are awarded/ under execution. One can expect many arbitrations over it. In case vendors and equipment suppliers win it, power generation companies will try to pass the compensation cost ahead through electricity tariffs,” said Arijit Maitra, independent counsel and power sector expert. “Any claim for compensation through electricity tariffs will be hotly contested by the beneficiaries.”

The Green Factor

The sulphur emission norms were first introduced to reduce particulate matter (PM) emissions, such as sulphur dioxide and oxide of nitrogen to improve the ambient air quality around thermal power plants.

In the last decade, power-generating companies have made multiple representations seeking relaxations and extensions, citing various execution and financing challenges. At the same time, installation of FGDs was advertised as a green step, with most power producers listing it under their sustainability measures.

The latest notification was a U-turn from the initial mandate. The ministry said the decision was based on representations stating various factors, including techno-economic feasibility, price escalations and low sulphur dioxide concentration in ambient air, and findings by research institutions regarding effectiveness and rationale.

A report prepared by CSIR-NEERI, with financial support from NITI Aayog, in its recommendations said that its analysis suggests that the ambient sulphur dioxide concentration at monitored stations was below the prescribed norms, and this is even though most of the thermal power plants have not installed FGDs.

Sayooj Thekkevariath, partner at Climate Change and Sustainability Services (CCaSS), EY India, sees it as a balancing act. “The development presents a mixed bag of implications, necessitating careful monitoring and adaptive strategies, as its aims to balance environmental protection with economic realities, potentially reducing power generation costs and easing financial burdens on utilities,” he said.

The report also said that installing these systems not only cost more money but also increased power and water consumption and raised consumer tariffs, all while increasing the carbon footprint without environmental benefits.

Vibhuti Garg, director South Asia at IEEFA, called the move deeply concerning. “It’s contradictory that while cities on one hand are aggressively pushing electric vehicles and curbing polluting vehicles, or looking at cloud seeding which is far more expensive than FGD installation in thermal power plants which are major contributors to air pollution — are being let off the hook,” Garg said.