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India’s future coal-fired power project pipeline carries a massive stranded asset risk due to the collapse in the average utilisation rate of its coal-fired power fleet, leading to an underestimation of financial risk for new projects, according to a report from the Institute for Energy Economics and Financial Analysis (IEEFA).
There are currently 33 gigawatts (GW) of coal-fired power plants under construction and another 29 GW of proposed projects under various stages of regulatory approval in India.
Energy finance analyst Kashish Shah says the levelised cost of energy (LCOE) is the required tariff at which the net present value of the investment is zero. LCOE is the minimum required average tariff for a power asset to reach a breakeven return at the end of its life. Anything less than that suggests the asset is unviable.”
Also read: India's coal production drops marginally by 2 per cent in FY'21
Shah found that the average utilisation rate of India’s coal-fired fleet has collapsed to a financially unsustainable low of 53 per cent in the financial year 2020-21 from a high of 78 per cent a decade ago in FY2011-12.
LCOE calculation
For most coal plants in India, the LCOE is calculated with an assumption of utilisation factor at 85-90 per cent throughout the life of the project. However, the LCOE turns out to be 64 per cent higher with India’s average capacity utilisation factor sitting at 55 per cent for the last few years.
“The aspiration for further builds of coal capacity stems from the notion that coal is still cheap,” says Shah. “However, with tariffs now below ₹2/kilowatt hour (kWh), solar power is cheaper than even the variable cost of coal-fired power and is ready to absorb incremental daytime demand.”
IEEFA’s report highlights that utilisation factors of coal-fired power plants have declined in India, and also across major electricity markets including China, the UK and the US.
“With zero fuel costs, the marginal cost of generation for renewables is practically zero,” says Shah. “On the other hand, with increasing inflation in Indian domestic coal prices and railway transportation costs for coal, the gap between cost competitiveness of renewables versus coal is widening. This raises a serious concern about the viability of coal-fired power plants.”
The financial viability of India’s proposed and under construction coal-fired power projects should be re-evaluated based on the right estimation of the utilisation factors including LCOE and capacity factor to avoid further bloating of non-performing assets.
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