As Chinese coal consumption growth continues to slow, attention is increasingly turning to India.
We have undertaken in-depth financial modeling to evaluate the prospect of India as the next big thermal coal import market. The results demonstrate that fundamental structural problems confront companies looking to invest in coal export projects aimed at the Indian energy market, with the financial outlook for coal proposals already bad and anticipated to become worse.
With regards to anticipated Australian coal export proposals, the landed cost of imported coal from the Galilee Basin will require a price approaching US$90/t to recover costs – more than treble the current domestic coal price in India. Coal fired generators burning Galilee Basin coal will only be able to do so profitably in a scenario in which the wholesale price of electricity is up to double current levels.
Renewable energy costs (especially solar) are already below the cost of imported coal-fired electricity generation, and will not rise. For these reasons, we believe that the prospects for a sustained growth in coal imports into India are rapidly receding as projects are delayed.
Why is India critical for coal exporters?
In 2013, China consumed 50% of the world’s thermal coal. Unpinned by Chinese coal demand growth of 10% pa for the last decade, the global coal market has seen robust overall demand in this period. However, if one looks at the world excluding China, there has been a net decline in coal demand in the last decade. With Chinese coal demand growing at a subdued 2.6% in 2013, and the forecast for only very modest demand growth in 2014 – Bernstein’s seminal report of July 2013 titled “The beginning of the end of coal” is rapidly being validated.
In this context, India is increasingly critical to the stability or continued growth in the seaborne traded coal volumes. Domestic Indian coal production growth over the last five years of 3% pa has been insufficient to keep up with electricity demand growth of 6-7% pa. This has seen imports move from 10% to 20% of the total thermal coal market in India in this period.
Accounting for over 15% of total coal imports globally in 2013/14, India has long been viewed as the key new source of demand growth for the global seaborne coal market as Chinese demand falls away. Contrary to conventional thinking, we expect India’s coal import growth to slow rapidly over the next five years.
Pressure points likely to constrain growth in India’s coal imports beyond 2014
Foremost, the Indian economy has seen a rapid deceleration in growth over 2012-2014 after a period of 7-9% pa real economic growth in the preceding five years. Industrial production growth in the last two years has stalled – the annual growth in the year to Feb’2014 was +0.1%. We see growth running at half the 2006-2011 levels going forward.
India’s growth imbalance saw the current account deficit balloon over 2007-2013 to over US$80bn or a deficit of 5% of GDP last year. The greater than 20% depreciation of the Indian Rupee in mid-2013 highlighted the unsustainable nature of India’s trade deficit. The trade deficit primarily relates to the massive growth in India’s imports of fossil fuels (oil, kerosene, natural gas and increasingly coal), such that the currency depreciation and trade deficit are mutually reinforcing if economic growth is strong and the current nexus is not broken.
The coal-fired power generation sector in India has seen profitability collapse over the last three years due to a combination of construction delays, ballooning debt servicing costs (much of the sector’s borrowings are US$ denominated and unhedged), the inability to source exceptionally cheap domestic Indian coal (India’s domestic coal averaged US$23/t in 2013/14), fixed, often-below cost off-take tariffs and falling operating rates due to fuel-transportation delays.
As regular readers of RenewEconomy know, the final pressure point emanates from the continued decline in cost of renewable energy. With the installed cost of Indian solar free falling 65% over the last three years alone, solar and wind power are already lower cost sources of electricity than imported coal-fired power generators.
New imported coal-fired power costs double the Indian wholesale rates
In conjunction with Equitorials, an Indian financial modeling group, we have evaluated the required cost of wholesale electricity for a new coal fired power plant in India relying on imported coal.
We have made specific reference to coal sourced from Adani’s Carmichael and GVK’s Kevin’s Corner proposals in the Galilee Basin in Queensland. We use our estimate of the full cost of production for each of these two mines, that being A$72/t and A$69/t respectively. To this we add a profit margin of A$10/t to cover the interest servicing costs and return on equity sufficient to justify the A$4-5bn mine construction capital cost. This gives a free-on-board price requirement of A$82 and A$79/t. At the current A$/US$0.93, this translates to US$77/t for Carmichael and US$74/t Kevin’s Corner.
By comparison, the latest spot price for Newcastle benchmark 6,000kcal thermal coal is below US$75/t. We note the energy content of Galilee coal is 10-15% below the Newcastle benchmark. The ash content of Carmichael coal is three times that benchmark average, while Kevin’s Corner is in line with the benchmark.
Taking into account A$15-20/t for 400-500km of rail transport, A$5-6/t for port charges and A$16/t for shipping, we estimate the all in transportation costs of moving coal from the Galilee to coastal India at A$35-40/t.
Equitorials modelled the cost of constructing a new imported-coal based power plant in coastal India. With an assumed 3-4 year construction and commissioning period, the delivered cost of electricity in 2018 using Galilee coal is estimated at Rs5.40-5.70/kWh. This is 40-90% above the current wholesale price of Rs3.00-4.00/kWh and treble the Rs2-3/kWh average of domestic-coal based power purchase agreements (PPA) signed over the 2006-2009 period that are now coming on-line.
We expect the new Government of India to take a national interest perspective
With the Indian national elections nearing completion, we expect the new government to take another strategic review of the dysfunctional and loss-making electricity sector in India. Given the related issues of energy security, energy diversity, water scarcity, air pollution, rampant inflation and currency pressures, building ever more imported coal-fired generation capacity is unlikely to be viewed as a sustainable solution.
With the cost of wind power in India averaging Rs4.60/kWh, and the latest solar auction (Phase II, batch 1) seeing solar pricing of below Rs5.50/kWh – renewable energy is an already price competitive alternative to imported coal. With further economies of scale and technology improvements, solar is expected to deliver double digit annual cost reductions for some time yet.
Renewable energy is deflationary
Our financial analysis also highlights another key differentiator of renewables over imported coal; fuel input price risk. Our modeling shows that not only does imported-coal fired power generation require a PPA of Rs5.40-5.70/kWh in 2018, but it also requires an estimated annual price increase of 4% to cover the likely currency and fuel cost increases. By comparison, a solar or wind PPA has a flat nominal price i.e. the real cost of power declines each year over the 25 year life of the project. Put simply, fossil fuels are inflationary, whereas renewable energy is deflationary.
To illustrate, an imported coal-fired power plant that sees construction commence today is forecast to require a price of Rs5.40-5.70/kWh when fully operational in 2018, but the required price rises to an estimated Rs6.37-6.85/kWh by 2025. For solar and wind that is commissioned in 2018, an electricity cost of Rs4.00-4.60/kWh is estimated, flat over the life of the project. This puts solar and wind at 40% and 30% lower cost respectively relative to imported coal-fired power in 2025.
To conclude, India’s electricity sector faces a very difficult transition. The problems for Indian coal electricity generators are compounded by a range of other challenges that face this rapidly developing economy that mitigate against the chances that India policy makers will favor large-scale centralised coal fired power generation in the future. We see the key priorities as: reducing rampant grid transmission and distribution losses; restoring generation and distribution company profitability; dramatically reducing power sector indebtedness and impaired loans; increasing the build-out of renewable energy capacity; and alleviating the fossil fuel based current account deficit. Building additional imported coal-fired power generation capacity is unlikely to figure prominently in the solution to India’s energy poverty.
This article is a summary of our full report, “Indian Power Prices”.[i] This report is for information and educational purposes only. It is intended solely as a discussion piece focused on the topics of the Galilee coal export sector, in conjunction with the Indian electricity sector.
 For Carmichael costings, please refer our report Adani – Remote Prospects. http://www.bloomberg.com/news/2014-04-10/china-plans-ban-on-imports-of-coal-with-high-ash-high-sulfur.html
For Kevin’s Corner, we have used estimates based on our report GVK – Stranded. http://www.ieefa.org/report-stranded-alpha-coal-project-in-australias-galilee-basin/