Gautam Adani takes small, firm steps to distance from coal as ESG concern grows

With environmental, social and governance (ESG) risk evaluation gaining prominence in global financial markets, pressure is mounting on the Adani Group to slowly distance itself from coal, a commodity that launched the meteoric rise of Gautam Adani into an infrastructure conglomerate.

Ironically, the Group’s coal exposure has now become a key challenge undermining its unstoppable march.

As India accelerates transition away from coal and towards renewable energy, Adani’s plan to step away from coal once the power purchase agreements (PPAs) for his thermal power plants end, is slowly starting to take shape.

Some recent developments bolster this view.

Carmichael coal mine project

After a decade of growing global campaign to ensure no financial institution is involved in the Carmichael thermal coal mine and rail development plan, the Adani Group confirmed it was unable to secure investor interest, and so had to resort to ‘self-financing’.

In September, it was revealed that Adani Ports and SEZ Ltd, the Group’s port unit, has agreed to set up a new Australian subsidiary to undertake rail haulage for the Carmichael project.

Branded the ‘Bowen Rail Company’, the new entity has no reference to its parent company, a clear indication of the brand damage the Carmichael proposal has inflicted on the wider Adani Group.

This entity will use Adani Ports balance sheet to fund investments, estimated at $350 m for a 27 million tonnes (mt) per annum rail haulage capacity.

In October, the Adani family owned Adani Abbot Point Coal Terminal Ltd was re-branded as North Queensland Export Terminal Pty Ltd.

In November, the Group re-branded its Australian mining business as Bravus Mining & Resources.

A few days ago, the Group announced a strategic collaboration with Italy’s Snam on exploration and development of the green hydrogen value chain, biogas, biomethane and low-carbon mobility in India.

Green energy

Adani Green Energy Ltd is steering the Group’s focus away from coal to improve its ESG ratings.

The combined equity capitalisation of the six listed Adani companies has reached a record high US$38.1 bn and the combined enterprise value (equity + debt) is about $53 bn. At current prices, the Adani Group’s gross equity share of its six listed entities has a capitalisation of $26.4 bn, a three-fold rise on the $8.7 bn in May 2015, after Adani Enterprises Ltd (AEL) completed a deconsolidation exercise.

In comparison, the Adani Group’s share of listed net debt is US$10.7 bn.

The composition of the Adani Group has also transformed dramatically over the last five years, with the most valuable stake being in Adani Green Energy Ltd (44% of the Adani family equity value total), almost double Adani Ports and SEZ Ltd (23%).

Adani Green Energy represents US$11.7 bn or 44% of the Adani Group’s total equity share of its six listed entities. Adani Green shares have grown a mind boggling 2,400% since listing in June 2018 to become one of the best performing shares.

Adani Green Energy is now a top 25 listed company in India with a market capitalisation of Rs 1,168 bn ($15.6 bn), 50% bigger than the original crown jewel of the Adani Group - Adani Ports & SEZ Ltd.

Adani Ports is $6.1 bn or 23% while Adani Transmission, spun out and listed from AEL in July 2015, represents $2.7 bn or 10% of the Adani Group gross equity.

The wealth destruction at Adani Power, though, stands in stark contrast. Adani Power shares were listed in 2009 at Rs 100 per share, peaked in 2010 at Rs 141 and are now just Rs 37, down 63% in just over a decade. The power unit is down to just 5% of the Adani Group’s gross equity exposure in listed entities.

Adani Green, Adani Ports and Adani Transmission all have significant access and standing in global financial markets (both debt and equity), leveraging an unparalleled financial strength in India, the Institute for Energy Economics and Financial Analysis (IEEFA) wrote in a report written earlier this month.

“However, with this comes a significantly higher profile. With environmental, social and governance (ESG) risk evaluation never more prominent in global financial markets, the Adani Group has much to leverage, but also much to lose,” the IEEFA said.

India, according to IEEFA, holds one of the global keys to the success – or failure – of the global treaty on climate change, popularly referred to as the Paris Climate Agreement.

For India, and the world, the economics of renewable energy are now entirely aligned with the capacity and domestic resources of the country.

The economics of renewable energy, batteries, electric vehicles and green hydrogen are all on a mutually reinforcing path of ongoing cost reductions that will make energy even lower cost and more sustainable as the coming decade unfolds.

For India, this means accelerating the deployment of domestic renewable energy investment and electrification strategies. This serves multiple objectives: improving India’s energy security by reducing reliance on expensive imported fossil fuels; driving new investment and employment to stimulate sustainable economic growth post COVID-19; driving deflation by introducing low cost, domestic renewable energy; starting to address India’s chronic and unsustainably bad air and water pollution; and driving decarbonisation of energy and industry.

Given this backdrop, IEEFA argues that it is an opportunity for the Adani Group to take a national leadership position and accelerate investment aligned with India’s sustainable economic growth. This means more investment in renewable energy and more investment in solar and battery manufacturing as well as grid T&D.

And, to accelerate India’s progress on a sustainable low-cost energy trajectory, the Adani Group should commit to an orderly coal power phase out through a progressive coal-plant closure program when power purchase agreements (PPAs) expire, knowing the massive ongoing renewables deflation means these coal plants will be unviable and obsolete, says IEEFA.

Gautam Adani penned a May 2020 newspaper article forecasting exactly this outcome, marking a strategic pivot in his thinking.

“Such a commitment would enhance the Adani Group’s ESG standings, lower the cost and raise the access to international capital and allow the group to continue to prudently fund its aggressive growth plans. It would also be entirely aligned with – and lead – India’s energy strategy and put Prime Minister Narendra Modi’s decarbonisation vision firmly on the global stage,” IEEFA wrote.

Adani Power invested more than US$10 bn in new power plants over the last two decades, but the family’s equity has been progressively diminished by a decade of substantial, ongoing net losses, to the point where the Group proposed delisting this entity. It also probably reflects Adani Power’s dramatically reduced access to new debt or equity capital.

Adani Green, Adani Ports and Adani Transmission are each of serious global investor interest, and as such are materially exposed to the wider Group’s ESG standing. A negative rating will increase borrowing costs and diminish investor interest, while a positive effort will benefit the Adani Group, if credible.

The move by Adani Ports into directly funding the Carmichael coal project “should raise significant ESG red-flags for global investors”.

Indian electricity demand grew just 0.5% in FY2020 and in the first half of FY21 is down 11.1% year-on-year. Within this, coal-fired power generation is down 15.7% in the first half of FY2021, putting the country on track for the fifth consecutive year of falling average coal plant utilisation rates, from a peak of 58% in FY2016 to an unsustainably low 51% average in the first half of FY2021.

The first half of FY2021 also marked a record high 11.2% share from renewable energy (27.4% share including large-scale hydro), up from 10.6% the previous corresponding period (24.9% including hydro).

While still the dominant, expensive, highly polluting legacy electricity fuel source, coal-fired power generation hit a decade-low 65.4% share, down from over 75% just four years earlier. In fact, 100% of the national electricity demand destruction during COVID-19 was borne by coal power plants.

This trend away from loss-making thermal power plants has been clearly underway for some time. FY2018 saw a net capacity expansion of thermal power plants across India of just 5.0GW, down 75% from the 20.5GW installed just two years earlier.

FY2019 saw a further 35% decline to just 3.5GW of net new thermal capacity adds, albeit with a slight recovery to 4.4GW in FY2020.

Phasing out coal projects

In August, the Adani Group Chief Financial Officer Jugeshinder Singh said that thermal coal mining would play a significantly reduced role in the Group.

“Coal-related and mining-related businesses are becoming an increasingly insignificant part of the group’s portfolio. Carmichael rather than being a mining business is now a support business for Adani Power,” he said.

Thus, a globally important pledge to phase out all coal power generation might have limited cost to the Group, but would dramatically improve its brand, and materially allay growing ESG concerns relating to the Carmichael coal mine involvement.

Such a pledge could allow the Adani Group to do a strategic rethink of how best to minimise the climate / financial risks to Adani Green, Adani Ports, Adani Enterprises and Abbot Point Coal Terminal.

The group is now far more diversified in 2020 that it was a decade ago, with a predominant reliance on regulated or government-backed infrastructure assets in ports, airports, grid transmission, gas transmission and renewable energy.

It has leveraged this infrastructure profile to best advantage, tapping into global capital markets at increasing frequency, both in terms of equity and debt. The $760m sale of 37.4% of Adani Gas Ltd to Total in October 2019 was followed by the $500m sale of 50% of 2.1GW of solar assets to Total in February 2020.

The Group has rapidly diversified its debt access, taking global bond markets from 14% of total group borrowings in March 2016 to 47% by March 2020. Given the relatively closed, shallow Indian financial markets, and ongoing Indian financial institutions debacles, this has proven to be a key strategic strength for the Adani Group. 

However, with ongoing ESG issues and Globally Significant Financial Institutions (GSFI) increasingly introducing coal exclusion policies, this could prove an achilles heel, says IEEFA.

In April 2019, Tata Power said it will never build new coal-fired power plants and instead focus on renewable energy.

In September 2020, state-owned NTPC Ltd announced it will stop pursuing new greenfield coal-fired power projects and release land acquired for this purpose as part of an ongoing strategic shift to build 30GW of renewable energy by 2032.

The question now is when will Adani Group follow suit?

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