Time to open up coal sector long gone

M Ramesh | Updated on June 03, 2020 Published on June 03, 2020

Worth the effort? Covid-19 has made the business case for opening new coal mines tougher to establish   -  RUPAK DE CHOWDHURI

Inviting private players into the sector will do little good given the growing preference for cheap and clean renewable power

The government’s move to back coal mining by opening up the sector for private sector participation (beyond owning mines for captive use) and spending ₹50,000 crore on evacuation infrastructure, has been roundly criticised as a step out of sync with the current global thinking on fossil fuels. Many have pointed out that renewable energy is significantly cheaper than electricity from new coal power plants.

Even ‘round-the-clock’ green power — where the developer promises to deliver steady power all day by either bringing in storage or mixing renewable energy with some thermal power — is offered for under ₹3 a kWhr. In a recent capacity auction, ReNew Power won 400 MW of capacity promising to sell power round-the-clock at ₹2.90 a kWhr.

Fading solar apprehension

Years ago, there used to be two arguments weighing against the use of renewable power. One, it was expensive. The lowest offer in the country’s first solar auctions, in 2011, was ₹7.95 — described then as a “sub-8 surprise”. The story since then is too well known to merit recounting here. Suffice to say, that wind and solar power have stabilised between ₹2.50-2.90.

The second point against the renewables was the ‘intermittency factor’. Wind blows, power surges through wires, wind slows, power slows. Likewise, in solar, if a cloud passes under the sun, the panels sit down to rest. This wasn’t a big problem when renewable power wasn’t big and could be absorbed in a sea of even and steady conventional power, but when wind and solar became big (now, 37 GW and 35 GW, respectively), the fickle flows became a headache for the grid managers.

But with developments such as improvements in forecasting and (consequently) scheduling, the opening of 11 ‘renewable energy management centres’ in the country with software to balance demand against zig-zag supply, the falling cost of storage batteries, and the advent of ‘flexible coal’— a new techniques that makes it possible to quickly ramp up and bring down generation, which was not possible earlier — the issue of intermittency is going away. This is reflected in offers of very low tariffs for steady power by renewable energy developers.

Demand for coal

So, who would buy power from coal plants? Power from the new coal plants, conservatively speaking, costs not less than ₹4 a kWhr. And since fuel cost is allowed to be passed on to consumers, any increase in coal price would raise power costs; wind and solar tariffs stay fixed for 25 years.

The government reads the situation differently. Take a typical year, say 2018-19, when India imported 285 million tonnes of coal. Of this, 50 million tonnes was coking coal, for making steel. There is no escaping from importing this, because our mines don’t have coking coal. Of the rest, 100 million tonnes of imported coal are lunch for the shore-based thermal power plants — the other 135 million tonnes of imported coal can be replaced with the local stuff. India has 320 billion tonnes of coal under its soil, so why import, spending lakhs of crore of rupees every year?

Also, Indian coal is veritably cheaper — Coal India’s supplies are 30 per cent cheaper than the imported variety. Since Coal India seems to have problems in ramping up production, why not invite the private sector in?

Many years ago, Videocon would answer the question why it was still producing CRT sets when the world was going for plasma and LED by saying it wanted to “harvest the declines” — meaning it would milk the dying market. The thinking for coal appears to be similar. There are still thermal power plants in the country hungry for coal. A few new plants might still need to come up. Coal, therefore, still has some steam left and the time now is to harvest the declines, seems to be the reasoning.

Shift towards renewables

However, such a reasoning is fraught with difficulties. The Covid-19 pandemic has just made the business case for opening new coal mines more tough to establish, by reducing the demand for electricity. Consequently, the prices of solar modules are expected to come further down from their current levels of about 20-21 cents a Watt, because of the looming glut in the market.

A recent study of JM Research and the Institute of Energy Economics and Financial Analysis notes that a 9 per cent decline in module costs can increase equity IRR by more than 200 basis points. Don’t worry about rupee depreciation, because large renewable energy companies are seen able to raise funds at interest rates of 7-9 per cent, fully hedged. Similarly, a 5 paise increase in tariffs will boost the equity IRR by 100 basis points. Solar plant economics are set to improve and they will have telling impact on tariffs.

New coal-fired power plants will struggle to come up against such compelling economics of renewable energy. As for the existing ones, which would still need coal, CIL’s expansion plans and captive mines seem to be well-positioned to cater to them. Even if coal mining companies manage to produce a convincing excel sheet, it will be extremely difficult to raise funds for coal projects, given the anti-fossil mood in the financial world.

The government proposes to auction 50 coal blocks. Even if these auctions happen next year, it will take five more years for the developers to start digging out the stuff. Coal mines last a good half a century, whereas it is extremely difficult to see coal-fired plants living even half that period.

Companies with skin in the game are saying they want to keep away from coal. Praveer Sinha, CEO of Tata Power, which has 7,430 MW of thermal power capacity, observes that the opening up of the coal sector “does not seem to be a long-term view of the situation.” JSW Energy, which has 3,140 MW of thermal power, said it is “re-evaluating” its plans for further expansion in thermal, and would do more in renewables instead.

So, reading from left to right, opening up of the coal sector for the private industry participation seems to be an idea whose time has long gone.

Published on June 03, 2020
This article is closed for comments.
Please Email the Editor