While the Adani Group has bounced back many times from adverse developments with respect to it’s Carmichael coal proposal, the run of negative news has continued at a rapid clip of late, putting the project in real doubt.
This week started badly for Adani, with the Downer Group announcing it had relinquished a proposed A$2bn non-binding Letter of Award received in December 2014.
This follows on from the Queensland government delivering its veto of the proposed A$1bn loan subsidy last week and a multitude of leading Chinese banks announcing a decision to avoid this controversial project the week before.
The Institute for Energy Economics and Financial Analysis (IEEFA) would suggest there is a common point of linkage: the building momentum of the Paris Climate Agreement combines with the unprecedented rate of renewable energy deflation evident globally in the last two years to make increasingly clear stranded asset risks for greenfield thermal coal export proposals.
As aptly highlighted by Geoff Summerhayes, Executive Director of the Australian Prudential Regulation Authority (APRA), the entry into force of the Paris Climate Agreement ‘brings the horizon forward’ for action on climate change.
Major financial institutions are addressing this rapidly evolving risk profile with policies to deliver on climate commitments and reduce stranded asset risk exposures by phasing out financing of new thermal coal.
This is clearly being addressed by both Australian financial market leaders such as National Australia Bank and a growing chorus of global institutions such as AXA and ING last week, following on from SCOR, Allianz and SwissRe in recent months. And Blackrock has said “Coal is dead” for any investors with a long term investment horizon.
IEEFA would view the series of announcements by the China Construction Bank, Industrial and Commercial Bank of China, Bank of China and most recently China Merchants Bank confirming they will have no involvement in the Carmichael coal proposal in this light – the cumulative climate, stranded asset and social licence risks make this project unbankable.
China is a world leader in low emissions technology sectors of the future, and clearly this project is inconsistent with China’s “Going Global” strategy in terms of its Paris Climate Agreement.
The Chinese decisions build on the move by the Palaszczuk government to veto the North Australia Infrastructure Facility’s (NAIF) proposed A$1bn subsidised loan to the Adani railway line from Carmichael to the Adani Abbot Point Coal Terminal.
In light of this, IEEFA also notes that the Queensland government’s election pledges would preclude the alternative, downscaled NAIF loan submission by Aurizon to build a railway line to the Galilee.
The government committed to veto “any NAIF loan that helps enable Adani’s mine, rail, power plant and / or port” and to “rule out any new direct or indirect subsidies to Adani.”
Put together, these statements mean Aurizon’s submission to the NAIF faces a similar veto to that enacted by Premier Annastacia Palaszczuk on Adani Mining.
Yesterday the Downer Group announced it had relinquished a proposed A$2bn non-binding Letter of Award with Adani Enterprises Ltd (AEL) for the construction and operation of the Carmichael mine received back in 2014.
AEL has said it will continue on with the Carmichael proposal as an owner-operator. IEEFA would suggest the financial risks of commissioning and operating a 25 million tonne per annum (Mtpa) export mine in a foreign jurisdiction are well outside the skills of the currently assembled team, not the least given the scale of the greenfield proposal.
While AEL has commissioned and operated a 6 Mtpa coal mine in India, its international mining experience is limited to a single Indonesian coal mine operation that has produced 5-7Mtpa since 2009, almost half it’s original target of 12-13Mtpa.
AEL remains highly leveraged, with net debt of US$3.8bn as of September 2017, 1.6 times AEL’s book value of shareholders funds at US$2.4bn.
This financial leverage is compounded by the A$1.5bn (US$1.2bn) carrying value of the Carmichael proposal (half of AEL’s book equity), which looks at clear risk post the loss of Chinese funding and Downer’s subsequent decision to withdraw.
Consistent with decision by the Downer Group to withdraw from the Carmichael proposal, the International Energy Agency (IEA) has today released its “Coal 2017: Analysis and forecasts to 2022”. This new assessment describes coal’s “decade of stagnation” since global demand peaked in 2014.
A key driver of this much more downbeat assessment is the faster-than-expected changes evident in India, the world’s second largest producer, consumer and importer of coal.
In a clear acknowledgement of the rapid success evident in Indian electricity sector transformation, the IEA has halved its forecast growth of Indian thermal coal demand by 2022, a cut of 14% or 115Mt to just under 700Mtpa.
With imports largely providing the balance of Indian power sector demand unable to be supplied from domestic coal mines, the implications for imports are even more material.
The IEA has cut its thermal coal import forecast for India by 39% or 65Mt to just 102Mtpa by 2022. Imported coal just can’t compete with renewable energy.
In light of the 50% decline in renewable energy tariffs to a record low of R2.44/kWh (US$38 per megawatt hour (MWh)) since the start of 2016, new renewable energy projects are lower cost than many existing domestic thermal power tariffs (which generally range from Rs2-6/kWh).
The November 2017 decision by the new Indian Energy Minister R.K.Singh to lift the country’s targets to 10 gigawatts (GW) of wind and 20 GW of solar installations annually means India’s previous 175GW of renewables by 2022 now looks decidedly conservative.
Renewable energy deflation is increasingly driving a global energy transformation, with solar tariffs down some 50% since the start of 2016 in Chile, Mexico, India and the UAE.
It is also clear that the same factors driving rapid deflation in solar costs are also driving down the cost of both onshore and offshore wind. Greater policy certainty, lower capital costs, ongoing technology improvements, learning by doing and economies of scale are all assisting.
Last week saw the cost of onshore wind in Alberta Canada drop 55% to just $37/MWh relative to the prices set in 2016, and similar declines of some 50% in onshore wind tariffs have been witnessed in India and Mexico, as well as for offshore wind in Germany and the United Kingdom.
It is in the context of the ongoing, faster than expected, technology driven deflation that highlights a clear and present danger for the global seaborne thermal coal sector.
This structural decline was acknowledged by Roy Green, the incoming Chairman of the Port of Newcastle (the largest coal export port in the world), who today stated: “Essentially this spells a new era for Port of Newcastle. The world’s biggest coal port is now preparing for the end of coal.”
Stranded asset risks are highest for greenfield thermal coal proposals like Adani’s Carmichael mine, and their associated rail and port infrastructure.
It is in Australia’s best interest to stop adding coal capacity into what will become an over-supplied market. Furthermore, the incumbents and the associated workforces and communities need a managed transition over the coming decade.
This transition critically needs to start now to manage the inevitable disruption and dislocations that are already beginning to be experienced as the world moves away from fossil fuels and towards renewables.
Authors: Tim Buckley, IEEFA’s director of energy finance studies, Australasia & Simon Nicholas, Energy Finance Analyst at the Institute for Energy Economics and Financial Analysis, IEEFA.
