India coal project cancellations snowballing

In a period of seismic change, energy forecasts can become obsolete even before a new analysis begins to gather dust.

A consequence for honest commentators is that numbers from even a few weeks back can be misleading. Of greater concern though, is the deliberate use of old data to deceive.

One of the gnarliest myths which continues to perpetuate – particularly in Australian political debate – is that Indian hunger for energy will drive increased Australian exports for decades to come.

Back in 2010, India’s coal pipeline stood at well over 600GW, a number to have every coal industry executive and ideologically-inclined Coalition backbencher drooling.

Unfortunately for them, it’s no longer true.

Between 2010 and June 2018 India’s coal-fired power station pipeline  saw shelved and cancelled projects totalling a staggering 573GW.

India’s Coal-fired Power Project Status

Source: Global Coal Plant Tracker (GCPT) July 2018
Note: GCPT also includes behind-the-meter captive power plants of capacity above 30 MW

India’s National Electricity Plan (NEP) for 2018 assumes 94 GW of new coal-fired capacity will be added between 2017/18 and 2026/27.

According to Global Coal Plant Tracker (GCPT)’s latest data, India’s coal-fired pre-construction project pipeline has shrunk by a quarter, or around 24 GW in the last six months alone.

That’s 55% of Australia’s existing operating capacity gone in half a year.

India’s thermal power giant NTPC ltd alone has reportedly shelved 10.5 GW of its planned coal-fired power projects year-to-date.

Project cancellations are coming faster as financial viability remains dubious and India upscales its low-cost renewable installs.

Many of the remaining coal project proposals are stranded before they are built.

Coal’s bad debts

The coal-fired power sector accounts for a significant share of non-performing assets (NPAs) that continue to trouble the Indian banking sector. The government estimates there are about 40.1 GW of stranded coal-fired power projects, of which 15.7 GW is not even yet commissioned.

Earlier this year, the Parliamentary Standing Committee on Energy report highlighted issues responsible for the financial stress in India’s coal-fired sector.

An absence of coal linkages due to the cancellation of assigned coal blocks, poor locations distant from coal sources, use of outdated imported equipment, lack of long-term power purchase agreements (PPAs) and delays in land acquisition resulting in cost overruns were some of the key issues that were identified by the Parliamentary committee.

Some of these projects had signed PPAs at aggressively low tariffs that make debt servicing difficult. In the meantime, variable cost related to the coal-fired generation has gone up due to increase in coal prices (particularly for coastal plants suffering from a doubling in import coal prices), as well as the cost of freight charges for coal transportation.

As per India’s Central Electricity Authority (CEA) estimations, the tariff for a new emission controls compliant pit-head supercritical coal-fired power plant should be Rs4.39/kWh (AU$86/MWh).

With super competitive renewable energy PPAs with zero indexation now regularly priced in the Rs2.50-3.00/kWh (AU$49-59/MWh) range, new coal power plants are struggling for viability across India.

The woes of India’s coal-fired power sector reflect the combination of excessive financial leverage, operational inefficiencies and competition arising from accelerated deflation in renewable energy tariffs, all of which make investors sceptical of the sector.

India’s financial sector is ill-equipped to force promoters to write-off their equity investment in stranded assets, resulting in delays and ultimately bigger losses to debt providers, given interest expense continues to accrue on long stalled projects.

Whilst lenders to the coal-fired sector are trying to restructure and resolve some US$40-60bn worth of stranded assets,[i]an accelerating number of developers are walking away from their planned, but now long-stranded, coal power plans.

NTPC walking away from coal

NTPC Ltd has displayed prudence by deciding to turn away from a growing number of stalled coal-fired power project proposals that have not moved in years.

In February 2018, the company shelved the 1,600 MW expansion of Kaniha stage 3 Unit 1&2 in Talcher, Odisha, on the back of surplus generation capacity in the state and shift to renewable generation across the country.

In June 2018, it dropped its 4 GW greenfield coal-fired Pudimadaka Ultra Mega Power Project,planned back in 2011.

Then last month, NTPC confirmed it has no intention of pursuing two other planned coal power plant developments – the 1,980 MW Nabinagar-2 and 1,600 MW Katwa thermal power generating units in Bihar and West Bengal, respectively.

The plants had originally arranged PPAs with multiple states including West Bengal, Jharkhand, Odisha, Sikkim and Bihar. Odisha’s energy minister had requested to cancel the PPA with Nabinagar Plant as the lower cost of renewables and the move to power surplus meant the demand growth was insufficient to justify these expansions.

This is not to say that NTPC is totally abandoning coal power generation any time soon.

With 47 GW of existing coal plants, it has been selectively acquiring equity stakes in financially distressed state coal power plants such as the Nabinagar Power Generating Company and Kanti Bijlee Utpadan Nigam Limited in Bihar in June 2018.

But its shelving of 10.5 GW since February 2018 represents a dramatic recognition of the dynamic state of the Indian electricity sector and size of the disruption from renewables.

Is it the end of coal?

With the National Electricity Plan (NEP) 2018 showing a planned 48 GW of end of life coal plant closures by 2027/28, India will likely need some additional coal power as an offset to closures.

However, this does not mean new coal plants are necessarily needed to fill the gap – the record low coal plant utilisation rates of just 57.4% in 2017/18 provides scope for 20-30% more generation via a better utilisation of existing assets.

Moreover, India’s remarkably ambitious renewables investment program is in the order of being sufficient to accommodate almost all incremental electricity demand growth that will result from 6-8% annual GDP (net of energy efficiency, grid efficiency plus nuclear and hydro-power additions).

The effect of surplus capacity, slowing demand, increased coal input costs and competition with cheaper renewable sources has left coal-fired power project development languishing.

As per CEA’s reporting, out of the last five quarters, three quarters have seen net negative additions of coal-fired power capacity as 2.6 GW of capacity was retired in this 15 month period.[ii] Plant retirements projected in NEP seem to be coming along as planned.

India Declining Thermal Capacity Share – NEP 2018 Additions & Retirements

Source: Central Electricity Authority of India (CEA), IEEFA estimates.

There’s no doubting India’s growing appetite for power, but its demands are largely being sated by clean energy, while fossil fuels are squeezed out of the mix.

This is what today’s numbers tell us.

And while they will undoubtedly keep changing fast, the direction of travel towards cheaper renewables will not.

References

[i]The Parliamentary Standing Committee report of March 2018 references 55,557 crore (US$8bn) of restructured standard advances and Rs34,244 crore (US$5bn) as NPAs as of June 2017. However, with 40GW of thermal power plants stranded, the total investment at risk is approaching US$40-60bn.

[ii]Net new coal power capacity additions reported by the CEA have slowed materially in recent quarters to just 3.6 GW in Q1 FY18,-1 GW in Q2 FY18, -0.5 GW in Q3 FY18, 4.2 GW in Q4 FY18, -0.2GW in Q1 FY19.

Author: Tim Buckley & Kashish Shah, Institute for Energy Economics & Financial Analysis