6 Reasons Why Coal Reforms Are Misdirected
On Saturday, finance minister (FM) Nirmala Sitharaman announced sweeping reforms in the coal and mining sectors. Earlier, only captive consumers with end-use ownership could bid. Now, any party can bid for a coal block and sell in the open market. The government has announced that entry norms will be liberalised and nearly 50 blocks will be offered immediately. There will be no eligibility conditions, the only consideration will be upfront payment of auction value. These will be offered to private companies on revenue sharing basis in place of fixed cost. The government also announced an outlay of Rs50,000 crore over the next five years to create infrastructure for coal evacuation, among other concessions and incentives. 
 
But does this reform make sense, given that the bulk of coal usage is to generate power, the demand for which has been hit by both long-term and short-term factors? 
 
1. Who Needs More Coal Now?
Yesterday, CARE Ratings released the findings of a study that says that the ailing power sector does not stand to gain from the reforms in the short term, with an accumulated coal inventory scaling to 51 million tonnes (as on May 13). The decision to spend Rs50,000 crore for evacuation facilities is expected to add to the volume over the long term and it would have very little impact in the short period. 
 
The nation-wide lock-down imposed to contain the Covid-19 pandemic has drastically weakened power demand because electricity consumption plunged by 19.7% in a month, finds a new data tracker developed by researchers at the Energy Policy Institute at the University of Chicago.
 
“A drop of 19.7 per cent is a stark decline – larger than the reductions we have seen in China, the US, or Europe as a whole, and similar to Italy between mid-March and mid-April,” said Fiona Burlig, assistant professor at the University of Chicago Harris School of Public Policy. Mr Burlig, along with Anant Sudarshan, South Asia director of the Energy Policy Institute at the University of Chicago and Steve Cicala, Assistant Professor at the University of Chicago Harris School Of Public Policy carried out the analysis presented in the tracker. 
 
This drop in demand comes against the background of slowing demand even before COVID hit us, and large surplus power capacity. As Praveer Sinha, CEO, Tata Power said: “There isn’t enough time for any new coal plant to run its full life and there is excess capacity now (with slower growth conditions). Any coal plant in the early stage of construction should be revisited. The government already has plans for 30000MW existing coal capacity to be closed as they are old.”
 
Since the power sector is the major consumer of coal, the government announcements on policy reforms by opening the coal sector for further mining does not seem to be a long-term view of the situation.
 
2. Getting Out of Coal
Interestingly, companies across the world are exiting thermal coal as it is an asset they no longer desire. Australian mining major Rio Tinto is the world’s second-largest mining company, and the first big mining company to divest from coal. It completed its exit from coal in Aug 2018. 
 
Australian mining multinational BHP has also divested from coal citing policy differences concerning climate change and a narrow range of activities of benefit to the company as important factor. 
 
Glencore is Australia’s biggest coal miner and, although it has been slow to divest from coal compared to other mining multinationals (even purchasing coal assets from these companies), it appears that pressure from investors has encouraged the company to start moving from coal. It has recently announced this year that it will not mine any coal. 
 
 
In Europe, Allianz has unveiled restrictions on coal lending to kick in in 2023. In Australia, Westpac has announced it will exit all support for thermal coal mining and power by 2030. Interestingly, Westpac also included a new section in its policy specifically on metallurgical coal, signalling support for decarbonising the steel sector. 
 
Westpac’s retreat comes as a major investor in Teck Resources, the world’s second largest metallurgical coal exporter, wants the company to dump its entire coal division to become more attractive to pension funds wary of supporting companies involved with coal.
 
The world’s biggest wealth fund has gone in for the world’s biggest fossil fuels divestment. The Norwegian Sovereign Wealth Fund has sold $3 billion worth of energy stocks and other companies it finds are seriously harming the environment.
 
The year began with the biggest asset manager in the world, BlackRock making a landmark announcement to divest thermal coal mining exposures from its US$1.8 trillion of actively managed funds. BlackRock’s exit (as the vanguard investor of the world) will have a large impact on how investors across the world view putting any further penny in coal. 
 
Banks like Standard Chartered have admitted publicly that it has withdrawn from thermal power projects as part of its efforts to deal with global warming. Coal industry will never be able to recover after this pandemic
 
According to the International Energy Agency, coal-fired thermal plants generate about 40% of the world’s electricity. But such plants are the energy source that produces 30% of carbon dioxide emissions, a major cause of global warming.
 
Major Japanese banks like Sumitomo Mitsui Banking Corporation( SMBC), Mitsubishi UFJ Financial Group (MUFG) and,  recently, the large public bank Mizuho, have led in strengthening environment, social and governance policies by announcing they will no longer fund any coal in the world. As mentioned by Japanese officials, these actions are based on the principle of pairing long-term investments with long-term risk assessments.
 
3. Stressed and Stranded Assets in Coal-based Power
A 2018 Parliamentary Standing committee report identified 34 coal power plants as stressed assets. However, India’s power sector faces a much larger problem. An IEEFA (Institute for Energy Economics and Financial Analysis) report released in December 2019 examined 12 coal power plants that were stranded but some of them were not included in a Parliamentary standing committee report. India’s thermal power sector could be looking at upto ₹4.5 lakh cr ($60bn) worth of NPAs (non performing assets). 
 
Contradicting recent claims from the environment ministry, India’s coal-fired power project pipeline is rapidly shrinking with 46 gigawatts of cancellations in the last twelve months adding to over 600 gigawatts of cancellations this past decade, finds a new note published by the IEEFA. 
 
Carbon Tracker has warned that governments and investors building new coal may never recoup their investment because coal plants typically take 15 to 20 years to cover their costs.
 
Important to note, that Power Finance Corporation (PFC), which is now being over-burdened to fund coal assets, is the only public financial institution that is funding coal power plants in India. 
 
Before the Rs20 lakh crore stimulus announcement, close to 54% of PFC’s loan books were towards coal assets. From this, 10% were already stranded- which is close to Rs47,454 crore ($6.8bn). 
 
Increasingly forcing public and private financial institutes to fund unprofitable and financially unviable coal projects will only result in increased NPAs and bad loan problems within the financial sector.
 
4. Coal Pricing - The Writing is on the Wall 
Coal is only considered cheap because the coal industry and coal-based power plants are highly subsidised. They do not have to pay for the full social and environmental costs of coal burning on people’s health, the natural environment and our climate. If these externalities were factored, it would double or triple the price of coal, which is causing long-term health impacts to large swathes of the population. 
 
But even without these externalities the price of renewables is becoming cheaper than the price of coal. 
 
Carbon Tracker revealed last month that it is already cheaper to generate electricity from new renewables than new coal plants in all major markets.
 
The cost of adding solar electricity stands at about Rs2.5 per unit generated, compared with around Rs4.5 rupees for new coal capacity, according to analysts. 
 
India is a trend-setter in renewables with the cost of building solar capacity having dropped 84% in seven years according to IRENA, International Renewable Energy Agency. 
 
Even in the middle of a national lock-down and a collapse in Indian electricity demand so far, the Indian government has announced completion of a US$2bn, 2GW solar tender at a near record low price ( Rs2.55/kWH) which points to the centre’s big push on 175GW of RE (renewable Energy) by 2022 and 450GW by 2030. It is thus counter intuitive to be investing in a technology of the past, by giving a fillip to the coal sector!
 
5. Encourage Renewables, Not Coal
Mr Sinha, CEO, Tata Power said, ‘’Renewables must be encouraged and protected as current steps of ‘must run’ status, scheduling of power, etc do not move the needle with DISCOMs so the central government should ensure that states taking the economic stimulus package do not act biased against renewable energy projects.” 
 
Mr Sinha added “This is an opportunity to rewrite many things not followed earlier and to move away from high carbon businesses in order to reduce emissions and move to energy sources which are  sustainable.’’
 
Vibhuti Garg, economist, International Institute of Sustainable Development said “The government is incentivising coal production and offering a lucrative business model to attract more investment to the sector. Given power is the biggest user of coal and given that coal based generation is now competing with cheap renewable energy power, any new coal build is out of question. India already has around 40 GW of coal based stranded capacity, and with low efficiency (PLFs) of existing power plants, why would any player invest in a business which will become a stressed asset going forward?” 
 
She added that it is amply clear that the future is renewable energy plus storage of different forms. It is useful, if as part of the massive recovery package, the government directs support and resources for increasing the deployment of such power, than investing its own or private players money in a business which is non-remunerative.
 
Fatih Birol, executive director, IEA (International Energy Agency) tweeted a thread on Twitter detailing how “Global energy demand is set to fall 6% in 2020, seven times greater than the drop in the wake of the 2009 crisis”. He added “Coal is set for the largest decline since WWII alongside sharp reductions for oil & gas.  Nuclear power is less affected, while renewables are the only energy source on the rise in 2020, thanks to priority access to grids & low operating costs”. 
 
Tirtha Biswas, Programme Lead at CEEW - Council for Energy, Environment and Water said "GoI's big plan to push coal gasification to replace natural gas in the fertilizer sector would help square energy and food security objectives. However, ammonia produced from coal gasification has a carbon footprint that is 1.8 times higher than that produced from the conventional process using natural gas. This could potentially offset the emissions intensity reductions achieved through investments in renewables.”
 
Whichever way you look at it, the opinion is unanimous there is hardly anything to be gained from these so called 'sweeping reforms' There are several factors which complicate things further.
 
6. Coal Gasification in Unviable
The government’s claims of gasification being a technology which will lower the environmental impact does not seem correct. While it may be argued that gasification doesn’t cause local pollution as a coal plant does, the truth is that it is much worse on many counts. First, the process of gasification of coal involves pulverisation which turns coal into smaller particles and synthetic gas, under pressure. 
 
Experts say the gas so formed is corrosive in nature, which will cause high cost of maintenance when put up, if nothing else. Experts also know that the overall carbon intensity of gasification is even worse than coal mining, and such a technology does not seem attractive at all from any point of view. Coal gasification is also an intensive extraction process which uses large quantities of water. For a country like India, which is suffering from acute water shortages, this will only add to the stress. 
 
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    COMMENTS

    Sudhir Jatar

    4 days ago

    In reality, the use of coal for power generation is increasing in India. In the energy balance in the consumption of primary energy, coal is 39% and increasing. While government has committed to the UN in its nationally determined contributions (NDCs) that emissions would be reduced 33-35 % by 2030 over 2005, apart from coal the share of crude oil in the energy balance is 38% and increasing while the commitment is to reduce imports by 10% over 2014-15 levels by 2022. Hence, I agree with Tata Power CEO that renewables must be encouraged. I wonder why there was no structural reforms and financial package for oil & gas industry with renewables in the forefront to reduce dependence on fossil fuels. India’s indigenous yearly production of crude oil is approximately 33 million tonnes while import dependency of crude oil on consumption basis is 85 % and increasing. I think the FM has got her priorities mixed up.

    SridharN

    4 days ago

    Surely govt must be aware of the above points. Besides are there no cancellations of renewable projects?

    sajjanisaac

    4 days ago

    Private players are not foolish to invest in hopeless projects merely because the Govt makes it available.
    Further, oil and gas are imported . Coal is local. India must have a fallback if oil and gas supplies get disrupted.

    ramchandranashok

    4 days ago

    Yes, you have submitted a very balanced and thoughtful viewpoint. And I felt that Bringing forward obsolete technology & ideas could happen in third world countries only.

    pullaraogv

    4 days ago

    Does it mean the policy makers in Government never thought of the above ?. Is thermal power is not at all required even for 'balancing of power sources'. What will happen, if for some reason, the power generating capacity of Solor plants is decreased ?. Are there not any alternative uses of coal ? Is it appropriate to throw out 'what is in our hand' as worth less ?. The articles is fully biased with negativity over Government policy and not balanced. Think - whether this type of articles does any benefit to the readers ?

    Ramesh Popat

    4 days ago

    coal call wrong number!

    Increased Central Government Borrowing Unlikely to Translate into Meaningful Fiscal Stimulus: Ind-Ra
    The Indian government’s announcement of enhancing the gross borrowings to Rs12 trillion from the budgeted Rs7.8 trillion in FY21 will largely take care of the revenue shortfall, leaving little space for fiscal stimulus, unless the government sharply cuts the budgeted capex and reprioritises expenditure, says a research note.
     
    In the report, India Ratings and Research (Ind-Ra) says, "Notwithstanding the low crude prices and increased excise on petrol and diesel, Ind-Ra estimates the gross and net-tax revenue of central government in FY21 to fall short of the budgeted estimate by Rs4.32 trillion and Rs2.52 trillion, respectively. As weak economic activities will also have an impact on non-tax revenue, we expect dividend and profit and other non-tax revenue to decline by Rs1.48 trillion from the FY21 budget estimate. This means the central government is staring at a revenue shortfall of Rs4.00 trillion from the FY21 budget estimate." 
     
    Ind-Ra says its calculation also suggests that the central government is unlikely to meet even the revised estimate of FY20 due to the country-wide lockdown. The centre’s gross and net-tax revenue is now estimated (best scenario) to be Rs1.73 trillion and Rs1.20 trillion, less than FY20 revised estimate and this would translate into a revenue shortfall of Rs1.62 trillion from the FY20 revised estimate, it added.

    As per the ratings agency, there is limited space for intervention by the government. It says, "We expect the revenue shortfall to account for 95.1% of the increased borrowings, leaving a purse of just around Rs200 billion for the central government to provide fiscal stimulus. This is too small an amount to make any difference to the sagging economic activities/demand. Clearly, the challenge is huge with hardly any fiscal space, despite an increase of gross borrowing by Rs4.2 trillion." 
     
    "Nonetheless, Ind-Ra believes the onus is on the central government to provide support to not only vulnerable sections of the society but also state governments, because the actual battle against COVID-19 and associated expenditure is incurred by the state governments," the ratings agency says.
     
    The ratings agency expects financial conditions to tighten further. It says, "Rs4.2 trillion increase in the gross market borrowings of the central government from FY21 (budget estimates-BE) and Rs6.0 trillion gross market borrowings of state governments will increase the supply of government paper in the market. We estimate the net market borrowing of central and state governments in FY21 to be Rs14.9 trillion or about 7.4% of GDP." 
     
    The system though has surplus liquidity and the Reserve Bank of India (RBI) is absorbing nearly Rs8 trillion in reverse repo window, Ind-Ra says it expects the financial conditions to tighten and volatility in the financial market to increase in FY21. 
     
    During 1 March 2020 to 11 May 2020, banks sanctioned loans of around Rs6.00 trillion to micro, small and medium enterprises, agriculture, corporates and non-bank finance companies. In a tighter financial market with limited fund availability, the government would crowd out the private sector in the first step and in the second, large borrowers would crowd out small borrowers, the ratings agency says.
     
     
    According to Ind-Ra, even before the COVID-19 impact, the Indian economy was staring at a mismatch between domestic savings and investments. Under institutional classification, the economy is divided into four categories - general government, public corporations, private corporations and households. Households contributes maximum to the gross value addition (44.3% during FY12-FY19), savings (61.1%) and fixed capital (39.2%) in the economy. Moreover, of the four categories, only households have the positive savings-investment gap. 
     
    "In other words, this means that the savings of households finance the investment requirement of other three categories. However, the financial saving of households has been declining over the years and was 6.5% of GDP in FY19 compared with 8.1% in FY16. In FY19, households’ financial savings declined to Rs12.3 trillion from Rs13.2 trillion in FY18," it says.
     
    On the other hand, central and state government borrowings are rising over the years. The net central government, state government and central public sector entities’ borrowings increased to Rs18.89 trillion (9.3% of GDP) in FY21 from Rs6.19 trillion (7.1%) in FY12. 
     
    Ind-Ra says, "The gap between net funding requirement of government sector (centre, state and PSEs) and households’ financial savings has narrowed lately, leading to sustained pressure on the interest rate. As a result, the interest rate has remained elevated and government of India securities (G-sec) and state development loans (SDL) yields have not moved in tandem with the policy rate."
     
     
     
    However, the ratings agency feels, deft footwork by RBI can help in current situation. It says, "Besides ensuring orderly functioning of the financial market and maintaining ample liquidity in the system, the RBI’s role is important even from the point of view of government’s cash management and market borrowing program. Higher ways and means advances and increased Treasury bill issuances can help in countering the short-term volatility in the financial market." 
     
    Ind-Ra says it believes the RBI has to play on the front foot and use all instruments such as open market operations, repo rate, operation twist and currency swap to ensure the fallout of higher borrowings on the interest rate. "Nonetheless we believe the interest rate will remain elevated, and deflecting some the government borrowings towards small savings fund would reduce the interest rate on market borrowings," the ratings agency concludes
     
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    gcmbinty.37

    1 week ago

    If to believe the India Ratings and Research (Ind-Ra) reports and the earlier unsuccessful loud economic promises in the last about six years, I am inclined to believe that this Government of BJP-RSS does not know how to manage national economy and how to be practical in managing expenditures. The time has come to think of the alternative governance.

    State FDA seeks price capping on N95 masks, writes to NPPA
    The Maharashtra government has written to NPPA (National Pharmaceutical Pricing Authority) asking for price capping of N95 masks. The state government has written in that letter that the MRP (maximum retail price) printed on the N95 mask is exorbitant. Maharashtra Health Secretary Sanjay Mukherjee wants it capped at the Government price of Rs42. We are hoping that the NPPA and the Textile Ministry of India take immediate appropriate action on this. 
     
    It is mentioned in the letter that “The Ministry of Consumer Affairs, Food & Public Distribution, Govt. of India also declared Hand Sanitizers and Masks (2ply & 3ply surgical masks and N95 masks) as an essential commodity under the EC Act, 1955 for prevention of hoarding, black marketing and profiteering of these items”. 
     
    Although the state FDA had submitted proposal vide letter dated 20.03.2020 to fix the ceiling price for Hand Sanitizers and Masks (2ply & 3ply surgical masks and N95 masks), the Ministry of Consumer Affairs vide notification dated 21.03.2020 fixed the ceiling prices of 2 ply mask, 3 ply mask and Sanitizers which would be effective till 30.06.2020, but the price ceiling for N95 mask was not fixed.
     
    The letter explains the gravity of the situation saying “At present situation, requirements of PPE Kits, N-95 Mask and its equivalent mask are tremendously increased, so in the interest of public health and availability at reasonable rate to ensure sufficient availability, it is necessary to control the prices of these products also, as in the market various types of N-95, its equivalent mask and PPE kits are available for sale at various prices”.
     
    The letter further says that consumers are not aware of the exact MRP and MRP printed is often exorbitant and that there is an urgent need to fix the prices of the N95 masks and seeks action on the same from the NPPA at top priority. 
     
    Ms Anjali Damania has tweeted about the letter here 
     
    After Ms Anjali Damania raised the issue of illegal sale of masks at exorbitant rates in the market, All Food and Drug Licence Holder Foundation (AFDLHF) also demanded strict action against manufacturers of the masks and said distribution should be done under the jurisdiction of the state government.
     
    No order has been issued yet. Moneylife as well as other activists and NGOa have been fighting for this. 
     
    Last week Moneylife shared the story here of how an appalling racket is going on in the production and sale of N95 masks that are crucial for healthcare workers dealing with COVID-19 patients. It was horrifying to see certain people thriving, hoarding, profiteering and scamming even as a pandemic is currently raging. You can watch Ms Sucheta Dalal explain the details of the N95 racket here
     
    Ms Anjali Damania had gone public and exposed this raging scam in N95 masks last week.
     
     
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