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Is India the fossil fuel nirvana imagined by Rinehart and Co?

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Plans to spend billions and billions of dollars in Queensland developing coal mines and associated infrastructure such as ports and railways are built on the apparently unshakeable belief that coal can provide the only solution to the rampant energy needs of India – one the one of the world’s two fastest growing energy markets.

Indian coal companies themselves have invested billions of dollars snapping up coal assets in Australia in recent years, and one company, GVK, is the major partner of Gina Rinehart in developing her massive coal project in the Galilee Basin in central Queensland.

But this enthusiasm for investing in Australian coal infrastructure is masking huge problems in the Indian energy market. While coal is often painted as pretty much the only option to fuel India’s rapid economic growth – nuclear is clouded by the fallout of Fukushima, and will not reach the scale some anticipated, while wind and solar are seen as marginal – there are signs that an increasing number of companies are reassessing their plans.  Fossil fuel generation is turning out to be uncertain, unreliable and unprofitable, and many are turning away from coal and gas generation and focusing instead on solar and wind.

India currently relies on coal, oil and gas for 70 per cent of its energy supply, and even that only reaches barely half of the population. However, poor supply and pipeline infrastructure, and the high cost of coal imports mean that coal- and gas-fired generation is becoming unviable, even in a country with huge economic growth, an energy deficit and massive energy needs.

It is estimated that 30,000 megawatts  of newly constructed coal plant in India is sitting idle, unable to source coal from the state-run body charged with doing so. It says the best it can do is 50 per cent – not good enough for a coal plant. Imports are not the answer either, because of the rising cost. Plans for around 8000MW of new coal-fired capacity are now on hold because of that, and those that have been built are losing money. The energy ministry has told builders of gas plants not to bother with developments until at least 2015 because there is not enough gas.

Welspun Energy, a subsidiary of the Welspun group, a large infrastructure and textile group backed by Apollo Global Management, estimates that India will surpass its ambitious solar targets by a factor of two, predicting that a lot of the investment planned for thermal power projects will go instead to renewables.

Welspun Energy was established to invest in wind, solar, coal and gas projects. So far it as signed up to more than 1000MW of wind projects and 1,500MW of solar projects, but nothing in coal or gas. “Most people don’t realize this yet but India’s power mix will change considerably,” Vineet Mittal, the head of Welspun Energy, told Bloomberg in a recent interview.

According to India’s Association of Power producers, some 1.9 trillion rupees ($34 billion) of coal and gas generation has been put on hold. Another 30,000 MW of completed power capacity is held hostage because Coal India cannot meet their coal needs. This includes CLP Holdings, the owner of Australia’s TRU energy, which has had a $1.3 billion, 1,2ooMW coal plant left “dead cold” by the lack of supply. A 600MW gas plant recently built by CLP is running on half capacity for the same reasons. Lanco has shut down a 600MW unit of its newly built Anpara C 1,200MW coal fired plant on account of a “coal shortage/feeding problem”.

Even those which have been built and operating are doing so at massive losses. Tata Power is India’s largest power producer, but its 4000MW Mundra facility, the country’s first “ultra mega power plant” is proving to be a financial disaster. Built at a cost of nearly $4 billion, it is losing money at an annualised  rate of more than $300 million a year, prompting S&P to downgrade the entire company’s debt ratings earlier this month because it was in danger of breaching debt covenants.

Tata Power has been hit by the soaring price of coal it sources from Indonesia, ironically from mines it owns itself. It has asked the pricing regulator for permission to lift its pricing by a third above the level it bid when it won the contract to build the plant. “Why would anyone want to invest at this stage in a coal project?” lamented the executive director of Tata Power in March. Like Welspun and CLP, Tata said it would favour wind and solar over coal in future.

The Hindu Express this week wrote that 8,000MW of coal-fired generation already contracted, and planned on the basis of imported coal from Indonesia, is now not going ahead because the price has risen too far. Indian regulators do not allow the extra cost to be passed on to consumers, cash strapped state governments are refusing to pay, in any case, and developers prefer to pay penalties for defaulting on their contracts, rather than suffering losses from going ahead.

The London-listed Vedanta Resources is building a 2,400MW coal-fired plant in Orissa, but is now told by Coal India that it can only deliver half the coal promised. “If we’d known this fact, we would never have invested in this,” said Abhijit Pati, the plant’s chief operating officer. Reliance Power has delayed construction on its own 4,000MW ultra mega power project at Krishnapatnam for this reason.

Of course, some people – Australian miners, right-wing think tanks, and certain sections of the media – think that fossil fuels remain the only possible solution. The Wall Street Journal published a 2,000 word feature at the start of the month on India’s energy woes, analysing how the coal and gas supply and pricing problems were hobbling the country’s ambitious economic growth plans – which this year have been cut from 9 per cent to 5.3 per cent. It did not make a single mention of renewable energy sources.

Yet India has an ambitious solar and wind energy development program, and many now think that these will be ramped up considerably in coming years – not because India suddenly signs on for dramatic climate change action, but because of energy security concerns, and costs.

The price of both wind energy and solar are falling quickly. According to Bloomberg New Energy Finance, the best wind farms have a levelized cost of energy, a measure that allows comparison between different fuel sources, ranging from 2.7 to 4.4 rupees per kilowatt-hour compared with coal’s 1.9 to 4.8/kWh. Welspun’s Mittal said that by 2017, the cost of coal will have risen to at least 7 rupees/kWh.

That will make solar cost competitive with coal as well. And because solar’s “fuel” falls from the sky and doesn’t need to be imported, or transported across rickety infrastructure, it offers a significant amount of energy security. Solar is already displacing diesel in many parts of India as a source of energy for manufacturing and business, and is being used at a micro level to bring at least some electricity to areas that have none. For this reason, some suggest India may offer a huge opportunity to build a new grid from the ground up, without interference from vested interests trying to protect stranded assets as occurs in developed economies.

Mittal says current projections for coal deployment overestimate the availability of coal and gas supplies and underestimate the rate at which the cost of fossil fuel-based power will rise. The government has set a goal of installing 20 gigawatts of solar capacity by 2022. Welspun estimates that it’s more likely to reach 40 gigawatts as renewables close in on the cost of fossil fuel-based power and answer a need for a reliable source of electricity in a nation beset by blackouts. KPMG earlier this year suggested India could be installing 20GW each year by the end of the decade.

“India is different from the US or Europe”, Mittal told Bloomberg, because renewables aren’t just competing on cost with fossil fuels. “It’s a question of energy security.” And renewables are attractive because they’re not vulnerable to disruptions. Given that, it is not hard to guess what sort of decisions will be made by the heads of Tata, CLP, Welspun, Reliance and Adani Power, and whether they will need quite as much Australian coal infrastructure and supplies as some people expect.

Addendum: Interestingly, India is not the only country having issues with fossil fuel production. Deutsche Bank noted in a report last month that the amount of new coal and gas generation constructed in China (the world’s fastest growing energy market) had declined 29 per cent in the first four months of the year, compared to 2011.

The National Energy Bureau had reported that one-third of new thermal generation had been delayed, and the amount of capacity installed before this summer’s peak demand would be 20 per cent less than in previous years. “This is a highly unusual sign,” Deutsche Bank analysts wrote, “as the delay has never happened in the past few years.” They blamed the delays on a “lack of enthusiasm” from Chinese power developers in fossil fuel projects.

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  • Concerned

    Of even more concern is how does the Australian Govt allow an Indian company to own 85% of the project,own the rail line and provide the shipping. Apparently there will be FIFO workers from OS as well if the reporting is accurate.
    Apart from ultimately dodgy accounting regarding profit(historical), what good does it do for the country.
    And this is a labour Administration?

  • mark

    Save Australian coal for Australia’s future.
    Keep our coal in the ground and sell it in the future when the price we get will be MUCH higher and we may have the technology to use it cleanly.
    Now is the best time for Australia make the inevitable transition to renewables.

  • http://www.heliocurrent.com Kyle Sager

    Nice…I think the same kinds of trends are happening over here. West Virginia mines are starting to close from bankruptcies and you’ve even got an Australian company fighting a US company to keep a Power River Basin mine open http://www.oregonlive.com/environment/index.ssf/2012/06/coal_clash_out_of_the_gigantic.html

    I think Powder River Basin has luxurious dreams of being the next Saudi Arabia of coal…(as though Saudi Arabia did anything substantial for most of its people…)