Saturday, November 14, 2015

Coal Assets at the Risk of Stranding?

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.

[1] See here for a detailed article on the basic issues, background and early developments in the case of two major project which have asked for these ‘compensatory tariffs’.

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