This is a follow up post, taking off from some points made in the earlier post titled "The Curious Case of Surplus Electricity in India"
Power plants whose viability is at risk due to low demands
are not the only one. The Crisil report mentioned earlier states that an
additional 33,000 MW of coal capacity is facing risks of becoming unviable – of
becoming stranded assets.
Stranded assets are essentially assets – that is,
investments, infrastructure projects etc. – whose economic returns fall before
their planned life. Such a fall in economic returns could be short- term,
long-term or even permanent. Traditionally, reasons for stranding of assets
have been seen mainly as financial or economic. However, there is increasing
awareness that assets can be at risk due to social and environmental factors.
This is probably seen most clearly in the case of coal based thermal power
plants, as extraction and burning of coal has severe impacts on the
environment.
Climate Change, Carbon Emissions and Risks to Coal Based
Power Plants
In recent years, with consensus emerging globally on the
need to aggressively fight climate change, reducing consumption of coal has
become an important goal. To avoid dangerous consequences of climate change,
scientists have said that the world’s temperature rise has to be restricted to
2oC. To achieve this, carbon concentration in the atmosphere needs
to be limited to 400 ppm. In turn, this imposes limits on how much fossil fuel
can be burned.
Based on such limits on how much coal can be burned, and the
number of coal based power plants existing and planned, several observers have
indicated that if the 2oC / 400 ppm goal is to be met, many of the
existing or planned power plants would become stranded. That is, there wouldn’t
be enough coal permitted to be burned to support all existing and planned power
plants, and hence, many of them would have to remain idle due to lack of fuel.
(See for example, several papers presented at the 1st Global Conference on Stranded
Assets And The Environment 2015, held on 24-25 Sept. 2015, organised
by the University of Oxford’s Smith School of Enterprise and the
Environment at Oxford, UK.)
While this may be true at a global level, it is unlikely to
apply in the case of India. This is because India will not accept any binding
restrictions on its use and consumption of coal. And rightly so. This is
because in terms of historical emissions, India has not been the main culprit
responsible for the cumulative accumulation of carbon in the atmosphere.
Further, its per capita emissions are fairly low. It rightfully expects those
who are responsible to bear the major obligation of addressing the problem.
This is also the accepted principle of ‘Common But Differentiated
Responsibility’. Given this, India’s coal plants are not likely to face
limitations from any regulatory restrictions on fuel, at least from the carbon
emissions angle.
Other Factors that Threaten Stranding of Coal Based
Generation Assets
However, India’s coal plants are still faced with the risk
of being stranded, but due to very different set of reasons.
The first reason is the one dealt with in the first part of
this blog. While India has planned rapid and large expansion of its coal-based
power generation capacity, there are questions about how much demand will be
there for the electricity generated from these plants.
The Crisil report notes three major reasons, apart from lack
of demand, that threaten the economics of coal based thermal power plants. The
first reason is the shortage of domestic coal and the problems with the coal allocations
to each power plant. The Crisil report says that some 13,000 MW of coal power
plants are at the risk of stranding because of fuel availability risk. However,
this report was prepared in July 2015, and since then, some of these risks have
been addressed. Yet, even with better coal availability, power plants still
remain at risk as the demand issue is not addressed.
The second reason noted by the Crisil report is that several
power plants had bid aggressively to win contracts and are now finding it
difficult to supply power at these low rates. They are therefore asking for
post-contractual changes and higher tariffs. This of course is the very
anti-thesis of the ’market principles’ which the power sector reforms are
trying to promote, and indicates that these principles are selectively and
conveniently invoked or bypassed[1].
These cases are pending in legal forums. The Crisil report argues that unless
these higher ‘compensatory tariffs’ are allowed, power plants with a total capacity
of 16,000 MW would be at risk of becoming unviable. However, there is little
attention paid to another side of the same issue: in case higher tariffs are
allowed, power will become costlier. Will DISCOMs then purchase it? Will not
the problem of lack of demand for high cost power be further aggravated and
pose a risk to these power plants from another angle?
The third risk noted by the Crisil report is that similar to
power plants, many of the coal miners who have bid in the recent auctions of
coal mines, have bid aggressively and their power plants are not likely to be
viable at such low prices. They put these at around 4000 MW of power plant
capacity. However, these projects also face the same dilemma – unviable at low
prices, but uncertainty of demand at higher prices.
Solutions to address these problems include reducing
transmission and distribution losses, reducing theft, and increasing tariffs –
the last one to ensure DISCOMs are financially sustainable. But if tariffs are raised,
who will be the buyers?
In other words, there is a fundamental issue at the heart of
the power sector in India – how much demand is there for power, given the
current high prices of electricity generation? And how to meet the demands of
those with lesser capacity to pay? And, will these aspects play a role in
deciding the scale of expansion of the generating capacity? If not, there are
very real risks of high stranded capacities.
Apart from these reasons related to costs of generation,
there are two more reasons, in my opinion, that will threaten the viability of
proposed, if not existing, coal based capacities.
Roll Out of Renewable Energy
India has massive plans for roll out of renewable energy
based power generation, particularly solar. Current targets are a capacity of
175,000 MW. Looking at the rapidly falling prices of solar PV, and sustained implementation
of the projects, there is a good chance of these capacities coming online as
planned, or at most with some delay. Given the scale of renewables, and their falling
prices, there is a real possibility that they will displace coal based power.
The Social and Environmental Impacts of Coal
While earlier I have argued against
the possibility of stranding of coal projects in India on account of carbon
emissions, the case with other social and environmental impacts of coal is
quite different. Mining, washing, transport and burning of coal have very
serious impacts on air, land and water. Mounting stocks of coal ash, running
into millions of tons every year, have become a massive burden on the
environment. All these in turn impact people’s health adversely. In a Press
Release dated 9-April 2015, the Minister for Power Shri Piyush Goyal announced
that[2]
“We have specially taken a big CSR initiative as we are going to establish 5
cancer hospitals in coal mining areas in the country.” What interpretation can
one have of this announcement? Does it mean that cancer is more prevalent in
coal mining areas? In any case, health impacts of coal are well documented.
There is little doubt that
increasing awareness amongst communities and the increasing scale of coal
mining and power generation will create more pressure on the Government to
introduce stricter regulations to control and manage pollution. This – if it is
implemented seriously, and not reduced to lip service – will mean more cost for
coal based power generation, and could also imply refusal of permission to some
plants. Another serious issue is the large amount of water consumed by coal
based plants. Given the increasing scarcity of water and increasing competition
for available sources, coal plants are likely to face constraints unless they
are able to reduce their water use significantly.
These and other social and
environmental impacts of coal are fairly well known, so there is no need to elaborate
them here.
However, it’s clear that in the
future, these aspects are likely to make coal based power costlier, and
increase its vulnerability to financial and other risks.
In Conclusion
While carbon emissions related regulations are not likely to
create risks of stranding for coal plants in India (and they should not), there
are other factors that are likely to threaten the viability of (some or even
significant part of) coal based power generation in India. Unfortunately, the
massive ongoing and proposed expansion of coal based power generation in India
has not factored in these aspects. The impacts of these factors are already
being felt, and it is necessary to undertake some urgent course correction by
giving consideration to these factors.
[2] http://pib.nic.in/newsite/PrintRelease.aspx?relid=118109
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