Why Australia’s chief economist gets it wrong on coal market, again

The Australian Government’s Office of the Chief Economist has this week released a report entitled “Coal in India”. The report relies extensively on the IEA 2014 for projections of coal demand in India, and as such uses IEA assumptions that were finalised almost a year ago.

But 12 months is a lifetime in this commodities market. As Ross Garnaut pointed out last week, the dangers of over-optimistic investment in the mining industry are stark, and the cost of that mis-investment may already be more than the potential cost of a 2c climate target out to 2050.

Most importantly, this cut-off by the IEA misses the dramatic developments announced post the central government election of Prime Minister Modi in May 2014. Since then, under the leadership of Energy Minister Piyush Goyal, the Government of India (GoI) has announced new initiatives almost daily with respect to the transformation of the Indian coal, power generation, grid distribution and utilities sectors.

First, a point of clarification. The Office of the Chief Economist (OCE) is the renamed Bureau of Resources and Energy Economics (BREE).

The report concludes that India will continue to rely on coal imports, and in fact goes further, stating that the GoI aims to lift imports to 350Mt by 2016-17. As a reference in support, the OCE report quotes Coal India Ltd’s year to March 2014 annual report. We would note that this report is again a year old. The report ignores Energy Minister Goyal’s target set in November 2014 to “possibly in the next two or three years we should be able to stop imports of thermal coal.” Goyal has articulated this target a number of times since and explained his plans to achieve this.

Since then, in April 2015 National Thermal Power Corp, (NTPC) Managing Director Arup Roy Choudhury stated his plan to cease thermal coal imports by 2020. To give context to this, the majority government-owned NTPC is India’s largest coal-fired power generator, operating 44GW of thermal capacity. The OCE report fails to evaluate or even mention this key target of the GoI. Given India will overtake China (China’s coal imports are down 38% year-to April 2015) to become the largest importer of thermal coal globally in 2015, this omission is rather material.

Secondly, any analysis of Indian coal demand needs to evaluate the electricity sector, given thermal coal is only one source of electricity generation. The GoI is pursuing what it terms the expansion of its options from a three horse to a seven horse race. Coal will increasingly have to compete with nuclear, gas, solar, wind, biomass and hydro-electricity alternatives, as well as grid and energy efficiency.

The OCE report states the GoI’s target is to expand renewable energy installations to 175 gigawatts (GW) by 2022, up from 65GW at the start of 2015. This statement is wrong – the GoI plans to add an additional 175GW to the existing non-hydro renewables base of 36GW as at end March 2015. This includes plans for 100GW of new solar, 60GW of onshore wind, 10GW of biomass and 5GW of small scale run of river hydro.

The GoI is also investing in a major expansion of large scale hydro-electricity, which is not included in the renewable energy target. The GoI is also undertaking a major expansion in nuclear electricity capacity, hence the 2014 Modi-Abbott discussions on allowing India access to Australian uranium. Likewise, Modi’s recent Australia visit also raised the need for India to access West Australian liquid natural gas (LNG) from Woodside to allow a significant lift in gas-fired power generation in India. India has 23GW of installed gas-fired power capacity, but lack of domestic natural gas has left more than half these plants mothballed.

The OCE report also claims India has 205GW of coal-fired power plants in operation – the Central Electricity Authority of India reports 165GW at end March 2015.

The OCE report cites that the GoI aims to double domestic coal production to 1,000 million tonnes per annum (Mtpa) by 2020. The report fails to articulate that this is solely the target for Coal India Ltd. The GoI actually targets 1,500Mtpa – so rather than a doubling this is actually a plan to treble domestic coal production. This 2020 target reflects 1,000Mt from Coal India Ltd, 60-80Mtpa from Singareni Collieries Company (another GoI owned coal mining company) and up to 490Mtpa from private coal mines relating to the coal auctions. A critical omission, given the 500Mtpa difference is more than double India’s 2015 thermal coal imports.

The OCE report states that Coal India Ltd’s production of coal has slowed from a 6% compound annual growth rate (CAGR) since 1978-2008 to only 2% CAGR over 2009-2013. While the report mentions production for Coal India Ltd was 494Mt in 2014/15, both the text and Figure 19 fail to update for this new data – ignoring that this was 6.8% year-on-year growth that accelerated as the year progressed, and that the new year has started even stronger, with Coal India Ltd reporting April 2015 was in fact up 10.7% yoy.

The report highlights the GoI’s recent moves to develop Ultra Mega Power Plants (UMPP), 4,000MW coal-fired power plants. What the report fails to mention is that this UMPP program has been a dismal failure, as IEEFA documented in its May 2015 report on the cancellation of the Cheyyur UMPP after three failed tender programs. Reliance Power just walked away from its Tilaiya UMPP after winning the tender more than five years ago.

Overall, in IEEFA’s view this OCE report does little to examine the risks to Australian thermal coal exports and the associated new mine and rail / port infrastructure that will be at risk of being a stranded asset should Energy Minister Goyal actually achieve his regularly stated goal for India to cease thermal coal imports in the next few years.

While it provides a valuable, in-depth perspective on the Indian coal and coal-fired power markets, the Institute of Energy Economics and Financial Analysis (IEEFA) would suggest the analysis has a number of omissions that together skew the rosy conclusion that India will be a net importer of thermal coal for the foreseeable future.

This is hardly surprising given the Indian coal ‘growth’ serves as the Abbott Government’s justification for using Australian taxpayers to fund private Indian billionaires’ investments in high-risk new coal ventures in Australia.

Tim Buckley, Director Energy Finance Studies Australasia, IEEFA