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Plunging cost of solar means peak coal looms in India

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Over the weekend the cost of producing solar in Mexico plunged to a new world record low.

Italian company Enel Green Power SpA, the renewable-energy unit of Europe’s largest and most successful utility will build a solar park in Mexico contracted to supply electricity at a world record low price of just US$18 per megawatt hour (MWh).

Earlier this month Chile announced its own record low solar tariff awards at US$22/MWh.

We are clearly heading into a rapidly decarbonizing global energy system at a rate that has been previously unimaginable.

The Institute for Energy Economics and Financial Analysis (IEEFA) has been analyzing the rapidly decarbonizing Indian economy for many years now.

The last two years has seen a 50% decline in both wind and solar tariffs to a record low US$38/MWh in 2017, more than 20% below the cost of existing domestic thermal power generation tariffs.

Many commentators have commented on the energy market disruption that has resulted and questioned if these record low renewable energy tariffs in India can be sustained or replicated.

What has happened in Mexico and Chile, two countries that have also has seen solar costs fall by more than 50% in less than two years gives proof that in the medium these Indian tariffs are not just sustainable, but likely to see even further deflation.

New modeling by IEEFA predicts that India is also within a decade of peak coal demand for the power sector. This is sooner than anyone has predicted. Under this scenario, Australia’s thermal coal export sector is set to take another hit.

IEEFA’s report, “Indian electricity sector transformation”, presents a sector model out to 2027 that sees a transforming energy market with a dramatic market share gain by renewable energy.  This in turn delivers sustained energy sector deflation.

By comparison, the International Energy Agency (IEA) World Energy Outlook 2017 forecasts India’s coal use will continue to expand, doubling by 2040 in its New Policy Scenario.

With such exceptional demand growth projected, the IEA assumes that even with a 150% increase in domestic Indian coal production, coal imports will reverse direction and rise by a third from current levels by 2040.

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In light of the continued decline in renewable energy tariffs, IEEFA would challenge IEA’s coal centric view of the world as entirely out of touch with energy developments in India under Prime Minister Narendra Modi.

While IEEFA forecasts are non-consensus, it was only in 2016 that the IEA acknowledged China’s use of coal peaked in 2013.

This was 17 years earlier than IEA’s 2030 forecast released just two years earlier. In our 700 page global coal demand and supply report prepared in conjunction with the UK’s Carbon Tracker Initiative, IEEFA called this peak in 2014.

India’s national decarbonisation policy is in line with a global trends which is seeing renewable energy infrastructure investment running at 2-3 times the level of new fossil fuel capacity investment since 2011.

India is on track to catalyse US$200-300bn of new investment in renewable energy infrastructure over the coming decade, and IEEFA expects global capital inflows will play an increasingly important role.

From the international banking sector, investors include Japan’s Softbank and Taiwan’s Foxconn, which have together made a US$20bn commitment to Indian solar power, as well as Goldman Sachs, JP Morgan, Singapore’s Government Investment Corp, Abu Dhabi Investment Authority, Global Infrastructure Partners, Morgan Stanley Infrastructure Partners and Macquarie Group.

Overseas electric utilities are also now active in the Indian renewables space, including Engie and EDF of France, Fortum of Finland and Enel of Italy.

Dutch asset manager APG, and Canada’s largest pension fund managers are also participating in Indian renewable infrastructure transactions. Brookfield, Canada’s largest infrastructure asset manager, is actively seeking new renewable energy opportunities in India.

Global development banks also have been increasingly active in funding renewable energy, supporting infrastructure (e.g. solar industrial parks) and grid development programs, with significant new investments in India by the World Bank, the Asian Development Bank, the European Investment Bank and KfW of Germany.

Indian renewables are also accessing the global capacity of the rapidly growing green bond market. To date in 2017, Indian renewable firms have raised US$3bn in green bonds, doubling India’s cumulative issuance to more than US$4bn.

While there are significant emissions reduction and pollution benefits in India from this clear and consistent energy policy, the strength comes from the fact that it is the economically sensible path: renewable energy is now the least cost solution to deliver sustainable growth for India.

As the world’s second-largest producer, consumer and importer of thermal coal, how India will meet a doubling of its electricity needs in the coming decade will have a major impact on global energy markets. It is now the third largest electricity user in the world behind only China and the U.S.

IEEFA modeling also shows that thermal coal imports not only peaked in 2014/15, and are set to drop two-thirds over the coming decade. India is Australia’s sixth biggest thermal coal export market and so there is clear message closer to home: the stranded asset risk of the Australian thermal coal export sector is significant. Our report can be read here.

The economics are inarguable. While IEEFA has consistently said that Adani’s proposal to import coal from the proposed Carmichael mine is too expensive and uncompetitive in the domestic Indian market, a shrinking timeline for peak thermal coal demand accentuates this point. Carmichael provides a dirty, expensive import coal source that India has made clear it no longer needs.

This idea, that India could be at or even near peak coal demand, would have seemed laughable just a couple of years ago. But technology and financial developments means this is no longer the case. The challenges to integrating India’s 40% renewable energy target by 2030 are real, but the momentum over the past three years, gained through a clear and transparent government policy plus growing economic merit, gives us confidence India will stay the course. Peak coal in India is in sight.

Tim Buckley is director Energy Finance Studies Australasia at IEEFA.  

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  • Joe

    But, but….. without Aussie / Adani coal hundreds of million of Indian citizens will forever live their days in ‘energy poverty’. Mal, Josh,Craig, Matt, Eric, Tony, quickly get over to India and stop this RE madness at once. Coal is the future, The COALition and Trump can see it, why can’t India?

    • Steven Gannon

      Modi announced a plan recently to give solar panels to the last million or so households not connected, that debunks it even further.

      Very concerning news today, the Chinese look like they are financing the project, including the railway line. The say financial closure is weeks away. In view of this, it’s plausible that a lot of this coal was always going to go to China. Economies of scale will help it be the last mine standing.

      • Joe

        Modi and his government are embracing RE and trying to wind back on any new big coal projects. Air pollution and the expense of building and connecting the millions in rural comunities to a grid is all a big disincentive for coal. But China, that is a worry them financing Adani. Not sure about your idea of the coal going to China though. China has massive air pollution problems and more coal is not going to help. Also China is implementing an ETS from January 2018, which shouldn’t do coal any favours either. I guess we will soon see what the China / Adani plan is really all about.

        • Steven Gannon

          There were conflicting statements in the ABC article. The industry insider said imminent and Adani said by the end of the Indian financial year, March 31.

          The article also said the 78% financers are metal manufactures and the deal likely involves them supplying a lot of the materials needed, so less jobs created here. “Worst deal ever.”

          • neroden

            Aha. So that’s what the scheme is.

          • Steven Gannon

            The saga continues. The #STOP ADANI mob get the good news this time. The affiliated bank – China Construction Bank say they’re not interested. We the people are going to win this.

            PS: Adrian Burrangba is challenging the validity of the ILUA. Back to court next year.

        • J Mareeswaran

          As the sun shines on India’s RE scene, the country prepares to wind back the reliance on old polluting sources such as coal.

      • neroden

        There is weird stuff going on in China. The central government is cracking down on coal but some local governments and local companies are going the opposite direction for various idiotic reasons. (It is a very, very high-population country, so no surprise it’s going in all different directions at once.)

    • Steven Gannon

      The Adani project.

    • mick

      with it they will die choking in black air

    • RobertO

      Hi All, Send them as quickly as possible with one way tickets only. Arrrr!!! aint love grand. Why is so little owed to so many (sorry Sir W.Churchill for the tonge in cheek) idiots in the COALition?

  • Grpfast

    And once again as coal goes belly up the investors ie Chinese communist government will walk away.
    Great big hole in Australia, destroyed environment, and world treasure Great Barrier Reef toast.

  • RobertO

    Hi All, China is moving away from Coal, and the Adani coal is poor quality so why would they take it. China has stronger polution laws that Australia and they already close factories to keep polution under control and I see them changing to RE as part of the method of reducing polution. The mine has no hope and Adani is just hoping to sell it to get out of the place. It the railway goes ahead it a plus for them as they get $2.00 a ton to the Cayman Islands (China would love that). Port Authur is Debt financed to $345 million, on top of the $1.2 Billion they already owe and the Mine is also in finanical trouble, about some $5 billion due over the next couple of years. The creditor are going to lose a lot of money on Adani, but Adani will lose very little money.

  • Karl

    The IEEFA report by Tim and colleague Kashish Shah is comprehensive and right on the money, and the coal proponents are increasingly missing the mark. Case in point – Benjamin Sporton, Chief Executive of the World Coal Association spruiked coal for India in the Financial Times a month ago, claiming that “even with annual growth rates above 10 per cent the share of new renewables like wind and solar in India is unlikely to reach 10 per cent of the mix before 2040”. In fact, solar and wind alone contributed 11,513 GWH to the grid’s total of 110,840 GWH in July (the peak renewables month, admittedly) thus achieving 10.3% of India’s power mix 23 years ahead of his forecast. See http://www.indiapowerreview.com for more analysis of this.

    • neroden

      Wow, that’s an impressively embarassing forecast. He predicts that renewables won’t reach 10% of production four months AFTER they reach 10% of production? That’s beyond bad projections, that’s inability to look in the past.