Why Govt Push For Private Investment In Unviable, Polluting Coal Sector Could Fail

New Delhi: The recent government push to encourage private investment in the costly, debt-ridden and highly polluting coal sector is misplaced given that renewables are becoming more viable, economically and technically, experts have told IndiaSpend.

On May 16, 2020, as a part of India’s Rs 20-lakh-crore ($2.65 billion) recovery package, Union finance minister Nirmala Sitharaman announced that the mining sector would be opened up to private players, allowing them to mine and sell coal in the open market. The move is aimed at reversing the slump in the coal sector, worsened by the prolonged lockdown. 

Two-thirds of the coal produced in India is used for electricity generation, a sector that has been struggling due to subdued power demand, which the lockdown has slashed further. Even in this field, the share of climate-friendly renewables, increasingly more competitive than coal, has been rising since 2015: solar tariffs are currently about 20-30% below that of coal-fired power in India. 

Coal has lost another edge over renewables--its greater dependability. At a May 2020 renewable capacity auction, a venture offered round-the-clock solar power generation at a competitive tariff.

In the first week of the lockdown, starting March 25, 2020, India’s daily power demand dropped by 28% on a year-on-year basis, according to a recent analysis by the Delhi-based think-tank, Council on Energy, Environment and Water (CEEW). In this period, thermal energy supply sources, mainly coal, were the worst hit--their supply dropped by 27.5% compared to the preceding week, the analysis showed. On the other hand, renewable electricity sources maintained their electricity contribution.

Globally, the environmental impacts of coal production--global warming, pollution and social conflicts--are repelling investments in the fuel. 

Even in business terms, coal is no longer a preferred option for multiple reasons, Nandikesh Sivalingam, director of the Delhi-based Centre for Research on Energy and Clean Air (CREA), told IndiaSpend. Subdued demand for power, over-installed power generation capacity in the coal sector, poor bankability of projects, financial distress, high cost of coal power--these factors are causing increasing disruption in the coal sector and these will intensify in the future, he said.

Renewables become unbeatable

To help the world curb global warming, in 2015, India promised to quadruple its installed renewables capacity for electricity generation to 175 gigawatt (GW) in five years. After this, the installation of renewables picked up pace in India and renewables now account for nearly one-fifth of India’s total installed power generation capacity, up from 13% in 2014, IndiaSpend reported on May 5, 2020.

Much of the movement away from coal is because renewables grew to become a highly competitive source in terms of economics and sustainability over the past five years, as we said.

Current tariffs in the Indian solar sector, hovering at Rs 2.50-2.87 per kilowatt-hour (1 unit of electricity), have stabilised at rates about 20-30% below the cost of thermal power in India, and up to half the price of new coal-fired power, according to a new study by Institute for Energy Economics and Financial Analysis (IEEFA) launched on May 22, 2020.

So far, the only advantage that coal had over renewables was the ability to provide round-the-clock power. But this too is changing: In a tender finalised in early May 2020, the levelised tariff cost for round-the-clock electricity from renewables emerged at Rs 3.60 per unit, a highly competitive rate compared to coal.

Coal is no threat to renewable energy as the latter’s tariff is deflationary while the price of coal energy is increasing with some escalation on a year-on-year basis, said Vibhuti Garg, energy economist at the IEEFA.

World shuns coal

Coal is the single biggest contributor to human-induced climate change. The burning of coal is responsible for 44% of carbon dioxide (CO2) emissions worldwide and accounts for 72% of total  greenhouse gas emissions from the electricity sector.

In India, the world’s third-largest carbon polluter, coal-based power plants make up for nearly 56% of India’s power generation capacity and are major polluters: These plants account for over 60% of the particulate emissions from all industries in India, as well as 45% of toxic sulphur dioxide SO2 and 30% of oxides of nitrogen NOx. These emissions can be attributed to 15% of the air-pollution-related deaths in India.

In September 2019, United Nations Secretary-General António Guterres urged countries to end coal subsidies and not to build coal plants after 2020. Countries around the world, Canada, Germany, Sweden to Austria are shunning coal-powered plants in favour of comparatively inexpensive renewable energy in an attempt to meet the Paris Agreement goal of keeping global temperature rise below 2 degrees Celsius above pre-industrial levels. 

Some of the world’s biggest mining and investment companies and banks too are taking this path. In this scenario, it is unviable for India to promote coal from a climate perspective.

India’s future emissions will be consequential in determining the global climate trajectory, attracting intense scrutiny of any move that appears to lock in coal, said Parth Bhatia, senior research associate at the think-tank Centre for Policy Research and a part of its Initiative on Climate Energy and Environment. However, the future of coal in India is more dependent on domestic developmental pressures--environmental and economic--rather than the views of the international climate community, he added. 

Opportunities shrink

In the measures announced by the finance minister, norms have been liberalised to facilitate the entry of private investment into coal mining. This included a new process for auctioning of mining blocks: Commercial ventures can now bid for a block by paying the government a percentage of their revenue instead of a fixed per-tonne cost--the practice followed by public companies and considered a hurdle in boosting coal production. This new auctioning process was green-flagged by the Cabinet Committee on Economic Affairs led by the prime minister on May 20, 2020. 

The change is “oriented to make maximum coal available in the market at the earliest”, said the statement, adding that competition would decide the market prices for coal blocks and give the sector a push. “Higher investment will create direct and indirect employment in coal bearing areas especially in the mining sector,” it said.

However, the fear is that India’s public-sector owned Coal India Limited (CIL), the world’s largest coal producer, has left little space for fresh private investments that could benefit from the mining reforms, experts said.

India consumed 968 million tonnes of coal during 2018-19, of which 728.72 million tonnes (75%) were produced locally and the rest were imported, according to government data. Of the locally produced, 83.28% came from CIL.

At the most, commercial coal will help power producers replace the imported coal they use “in a few years” and that will still be “a fraction of what they buy from CIL”, said Sivalingam. This too is likely only if private investment in commercial mining materialises soon, he added. Even then, “most of the power plants will have to continue to depend on CIL for their coal”, Sivalingam estimated. 

Further, CIL will soon be signing contracts with coal-based power producers to provide them with alternatives to imports. 

The government move to reform the mining sector “has not translated to enough interest and bidding by players”, said IEEFA’s Garg. The success of these reforms depend on India building more coal-power generation capacity, which is not a financially viable path given how expensive it is to build and operate a coal plant, said Garg.

Without enhanced capacity, more coal in the market could lead to a glut, driving down prices. This would force coal operations to scale back production to remain financially viable, Garg said. Thus, despite more mining players in the market, supply may not increase substantially, she said.

Stranded assets

Currently, three-quarters of India’s total electricity output comes from coal-fired power plants, as we said earlier. Though coal is becoming increasingly financially unviable, the Indian government plans to build more such plants and mine more coal: The expectation is that coal will provide at least 50% of India’s energy supply in 2030. 

Upto 34 coal power plants of about 40 gigawatt (GW) capacity in India have been designated as stranded assets, projects that have lost their economic value ahead of their anticipated lifespan, IndiaSpend reported on May 25, 2020. 

Further, India’s coal-fired power project pipeline is rapidly shrinking with 46 GW of cancellations in 12 months to March 2020 as funding dries up, adding to over 600 GW of cancellations this past decade, said a briefing note published on March 23, 2020, by the IEEFA.

Power Finance Corporation (PFC), a non-banking lender for the electricity sector, is the only public financial institute funding coal power plants in India. Before the stimulus was announced, close to 54% of PFC’s loan books were dedicated to coal assets. Of this, 14% were already non-performing assets (NPAs, or defaulted loans)--close to Rs 47,454 crore ($6.8 billion).

Increasingly forcing public and private financial institutes to fund unprofitable and financially unviable coal projects will only result in increased NPAs and bad loan problems within the financial sector, said an IEEFA report launched on May 7, 2020. 

The sector’s performance has declined gradually for several reasons--the lack of new long-term power purchase agreements (PPAs) that ensure business for new plants, coal shortage, and delayed payments by debt-ridden state-owned power distribution companies (DISCOMs) that are unable to buy more power and create demand in the market, said the IEEFA note from March 2020.

The declining efficiency of the coal power sector is evident in the declining Plant Load Factor (PLF) of India’s thermal power fleet. PLF is a measure of a power plant’s capacity utilisation and an indicator of its overall health. This factor for India’s coal plants declined from an average of 77.5% in 2010 to about 56% in 2020, the lowest rate in a decade, according to government data.

“We have created enough, in fact, more than enough assets (coal plants) for the next 20 years and any more public money invested in coal will only lead to stranded assets,” said Sivalingam of CREA.

(Tripathi is an IndiaSpend reporting fellow.)

We welcome feedback. Please write to respond@indiaspend.org. We reserve the right to edit responses for language and grammar.

New Delhi: The recent government push to encourage private investment in the costly, debt-ridden and highly polluting coal sector is misplaced given that renewables are becoming more viable, economically and technically, experts have told IndiaSpend.

On May 16, 2020, as a part of India’s Rs 20-lakh-crore ($2.65 billion) recovery package, Union finance minister Nirmala Sitharaman announced that the mining sector would be opened up to private players, allowing them to mine and sell coal in the open market. The move is aimed at reversing the slump in the coal sector, worsened by the prolonged lockdown. 

Two-thirds of the coal produced in India is used for electricity generation, a sector that has been struggling due to subdued power demand, which the lockdown has slashed further. Even in this field, the share of climate-friendly renewables, increasingly more competitive than coal, has been rising since 2015: solar tariffs are currently about 20-30% below that of coal-fired power in India. 

Coal has lost another edge over renewables--its greater dependability. At a May 2020 renewable capacity auction, a venture offered round-the-clock solar power generation at a competitive tariff.

In the first week of the lockdown, starting March 25, 2020, India’s daily power demand dropped by 28% on a year-on-year basis, according to a recent analysis by the Delhi-based think-tank, Council on Energy, Environment and Water (CEEW). In this period, thermal energy supply sources, mainly coal, were the worst hit--their supply dropped by 27.5% compared to the preceding week, the analysis showed. On the other hand, renewable electricity sources maintained their electricity contribution.

Globally, the environmental impacts of coal production--global warming, pollution and social conflicts--are repelling investments in the fuel. 

Even in business terms, coal is no longer a preferred option for multiple reasons, Nandikesh Sivalingam, director of the Delhi-based Centre for Research on Energy and Clean Air (CREA), told IndiaSpend. Subdued demand for power, over-installed power generation capacity in the coal sector, poor bankability of projects, financial distress, high cost of coal power--these factors are causing increasing disruption in the coal sector and these will intensify in the future, he said.

Renewables become unbeatable

To help the world curb global warming, in 2015, India promised to quadruple its installed renewables capacity for electricity generation to 175 gigawatt (GW) in five years. After this, the installation of renewables picked up pace in India and renewables now account for nearly one-fifth of India’s total installed power generation capacity, up from 13% in 2014, IndiaSpend reported on May 5, 2020.

Much of the movement away from coal is because renewables grew to become a highly competitive source in terms of economics and sustainability over the past five years, as we said.

Current tariffs in the Indian solar sector, hovering at Rs 2.50-2.87 per kilowatt-hour (1 unit of electricity), have stabilised at rates about 20-30% below the cost of thermal power in India, and up to half the price of new coal-fired power, according to a new study by Institute for Energy Economics and Financial Analysis (IEEFA) launched on May 22, 2020.

So far, the only advantage that coal had over renewables was the ability to provide round-the-clock power. But this too is changing: In a tender finalised in early May 2020, the levelised tariff cost for round-the-clock electricity from renewables emerged at Rs 3.60 per unit, a highly competitive rate compared to coal.

Coal is no threat to renewable energy as the latter’s tariff is deflationary while the price of coal energy is increasing with some escalation on a year-on-year basis, said Vibhuti Garg, energy economist at the IEEFA.

World shuns coal

Coal is the single biggest contributor to human-induced climate change. The burning of coal is responsible for 44% of carbon dioxide (CO2) emissions worldwide and accounts for 72% of total  greenhouse gas emissions from the electricity sector.

In India, the world’s third-largest carbon polluter, coal-based power plants make up for nearly 56% of India’s power generation capacity and are major polluters: These plants account for over 60% of the particulate emissions from all industries in India, as well as 45% of toxic sulphur dioxide SO2 and 30% of oxides of nitrogen NOx. These emissions can be attributed to 15% of the air-pollution-related deaths in India.

In September 2019, United Nations Secretary-General António Guterres urged countries to end coal subsidies and not to build coal plants after 2020. Countries around the world, Canada, Germany, Sweden to Austria are shunning coal-powered plants in favour of comparatively inexpensive renewable energy in an attempt to meet the Paris Agreement goal of keeping global temperature rise below 2 degrees Celsius above pre-industrial levels. 

Some of the world’s biggest mining and investment companies and banks too are taking this path. In this scenario, it is unviable for India to promote coal from a climate perspective.

India’s future emissions will be consequential in determining the global climate trajectory, attracting intense scrutiny of any move that appears to lock in coal, said Parth Bhatia, senior research associate at the think-tank Centre for Policy Research and a part of its Initiative on Climate Energy and Environment. However, the future of coal in India is more dependent on domestic developmental pressures--environmental and economic--rather than the views of the international climate community, he added. 

Opportunities shrink

In the measures announced by the finance minister, norms have been liberalised to facilitate the entry of private investment into coal mining. This included a new process for auctioning of mining blocks: Commercial ventures can now bid for a block by paying the government a percentage of their revenue instead of a fixed per-tonne cost--the practice followed by public companies and considered a hurdle in boosting coal production. This new auctioning process was green-flagged by the Cabinet Committee on Economic Affairs led by the prime minister on May 20, 2020. 

The change is “oriented to make maximum coal available in the market at the earliest”, said the statement, adding that competition would decide the market prices for coal blocks and give the sector a push. “Higher investment will create direct and indirect employment in coal bearing areas especially in the mining sector,” it said.

However, the fear is that India’s public-sector owned Coal India Limited (CIL), the world’s largest coal producer, has left little space for fresh private investments that could benefit from the mining reforms, experts said.

India consumed 968 million tonnes of coal during 2018-19, of which 728.72 million tonnes (75%) were produced locally and the rest were imported, according to government data. Of the locally produced, 83.28% came from CIL.

At the most, commercial coal will help power producers replace the imported coal they use “in a few years” and that will still be “a fraction of what they buy from CIL”, said Sivalingam. This too is likely only if private investment in commercial mining materialises soon, he added. Even then, “most of the power plants will have to continue to depend on CIL for their coal”, Sivalingam estimated. 

Further, CIL will soon be signing contracts with coal-based power producers to provide them with alternatives to imports. 

The government move to reform the mining sector “has not translated to enough interest and bidding by players”, said IEEFA’s Garg. The success of these reforms depend on India building more coal-power generation capacity, which is not a financially viable path given how expensive it is to build and operate a coal plant, said Garg.

Without enhanced capacity, more coal in the market could lead to a glut, driving down prices. This would force coal operations to scale back production to remain financially viable, Garg said. Thus, despite more mining players in the market, supply may not increase substantially, she said.

Stranded assets

Currently, three-quarters of India’s total electricity output comes from coal-fired power plants, as we said earlier. Though coal is becoming increasingly financially unviable, the Indian government plans to build more such plants and mine more coal: The expectation is that coal will provide at least 50% of India’s energy supply in 2030. 

Upto 34 coal power plants of about 40 gigawatt (GW) capacity in India have been designated as stranded assets, projects that have lost their economic value ahead of their anticipated lifespan, IndiaSpend reported on May 25, 2020. 

Further, India’s coal-fired power project pipeline is rapidly shrinking with 46 GW of cancellations in 12 months to March 2020 as funding dries up, adding to over 600 GW of cancellations this past decade, said a briefing note published on March 23, 2020, by the IEEFA.

Power Finance Corporation (PFC), a non-banking lender for the electricity sector, is the only public financial institute funding coal power plants in India. Before the stimulus was announced, close to 54% of PFC’s loan books were dedicated to coal assets. Of this, 14% were already non-performing assets (NPAs, or defaulted loans)--close to Rs 47,454 crore ($6.8 billion).

Increasingly forcing public and private financial institutes to fund unprofitable and financially unviable coal projects will only result in increased NPAs and bad loan problems within the financial sector, said an IEEFA report launched on May 7, 2020. 

The sector’s performance has declined gradually for several reasons--the lack of new long-term power purchase agreements (PPAs) that ensure business for new plants, coal shortage, and delayed payments by debt-ridden state-owned power distribution companies (DISCOMs) that are unable to buy more power and create demand in the market, said the IEEFA note from March 2020.

The declining efficiency of the coal power sector is evident in the declining Plant Load Factor (PLF) of India’s thermal power fleet. PLF is a measure of a power plant’s capacity utilisation and an indicator of its overall health. This factor for India’s coal plants declined from an average of 77.5% in 2010 to about 56% in 2020, the lowest rate in a decade, according to government data.

“We have created enough, in fact, more than enough assets (coal plants) for the next 20 years and any more public money invested in coal will only lead to stranded assets,” said Sivalingam of CREA.

(Tripathi is an IndiaSpend reporting fellow.)

We welcome feedback. Please write to respond@indiaspend.org. We reserve the right to edit responses for language and grammar.


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