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.
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
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.