Bryndis Woods, Researcher, Applied Economics Clinic David Schlissel, Director of Resource Planning Analysis, IEEFA September 2019 1 Risks Growing for Indias Coal Sector Over-Capacity, Water Shortages and Renewables Increase Pressure on Coal-Powered Generators Executive Summary Indias coal-fired generation sector is already facing serious problems. Raj Kumar Singh, the countrys power minister, warned last year that upward of 20 percent of the countrys installed coal capacity was in poor financial condition and had interest payments that exceeded profits. Worse, he said, 25 percent of that group was “totally unviable.”1 In this report, we argue that this is just the beginning of the ongoing problems facing Indias coal-fired generators. We see three major risks confronting the sector; these risks are already manifesting, but we believe they will intensify in the years ahead. These risks are: 1. The over-building of coal-fired capacity. The coal construction boom in the first half of this decade has now come to an end but leaves a critical legacy of significant over-capacity. The construction boom in the early 2010s was so pronounced, in fact, that the amount of installed coal-fired capacity in India is now 20 percent higher than the countrys peak demand level and fully 50 gigawatts (GW) above average demand levels. 2. Increasing competition from low-cost renewable and hydro*2energy sources, particularly during the monsoon season. Coal is becoming increasingly uncompetitive in the Indian energy market because of growing competition from cheap renewable solar and wind energy sources. Low-cost renewable energy has a particular advantage during the monsoon season. Complementary to the coal generation dip, wind and hydro generation provide an offsetting peak. 3. Declining water supplies. Groundwater levels across India are in decline. Since 2012, both total annual rainfall and monsoon rainfall have been below * This report was revised on September 9, 2019 to more clearly define the various categories of energy resources of renewable energy, large hydro and thermal power as included in data from the Government of Indias Central Electricity Authority. 1 Sushma, U.N. and Anand, N. Cheap renewable energy is killing Indias coal-based power plants. Quartz India. May 9, 2018. Risks Growing for Indias Coal Sector 2 normal levels across the country (except for 2013 in both cases). This is a major threat for coal generation, which requires substantial amounts of water for steam production and cooling, and has already led to production cuts at several plants on a number of occasions. Our analysis shows that these problems are already undermining Indias coal generator output. We find that overbuilt coal capacity has left two related problems. First, the utilization rates of individual coal plants have fallen, impairing their economic competitiveness because they must spread their costs over a diminishing number of kilowatt-hours (kWh) sold during the year. Second, over-capacity has burdened the system as a whole since the capital costs of the plants still need covering even if their electric output is not needed.3 We also find that the wave of new renewable capacity planned for India, 275GW in total by 2027 and as much as 500GW by 2030, is going to undercut coal across the board. Recent prices for renewable power tenders have come in below the average price of electricity from NTPC, the state-run utility that operates 53GW of coal-fired capacity. Going forward, prices for onshore and offshore wind and solar are expected to continue declining while prices for coal-fired generation are likely to rise. The economics already favor renewables, and we expect the cost disparity between renewables and coal to widen as time goes on. Finally, we find that water shortage problems forced 61 plant shutdowns from 2013-2017, resulting in roughly 17,000 gigawatt-hours (GWh) of lost generation (and revenue). Water-related problems are certain to worsen as the impacts of climate change continue to manifest, exacerbating the duration and severity both of flooding and drought. The latter is particularly concerning since about 41GW of Indias installed thermal capacity is located in drought-affected areas, with about 37GW located in “extreme drought” areas.4 It is our conclusion that these issues, coupled with rising concern over climate change and increasingly ambitious government commitments to address it, will be an insurmountable hurdle for Indias coal sector. The report, prepared by the Institute for Energy Economics and Financial Analysis (IEEFA) and the Applied Economics Clinic (AEC), is organized as follows: Chapter 1 provides a brief background of Indias electric sector; Chapters 2, 3 and 4 explore the three risks outlined above; Chapter 5 focuses on the financial impacts these risks already are having on both the power and banking sectors and analyses how these risks will continue to affect the two sectors moving forward; and Chapter 6 presents some concluding recommendations. 3 Barnes, I. The prospects for HELE power plant uptake in India. IEA Clean Coal Centre. November 2016. 4 Personal communication with Asar analysts (Vinuta Gopal and Harshit Sharma). Their estimate is based on data from the state natural disaster management monitoring center and WRIs Aqueduct tool to identify thermal capacity in water stressed regions. asar.co.in/. Risks Growing for Indias Coal Sector 3 Table of Contents Executive Summary . 1 Indias Electric Sector . 5 Risks From Coal-Fired Over-Capacity . 8 Risk of Competition From Renewable Energy Sources . 11 The Monsoon Example. 11 Growing Risk From Solar . 14 Risk of Inadequate Water Supply . 17 The Risks Become Reality Lost Generation, Rising Financial Instability . 22 Conclusion . 25 About IEEFA/AEC . 26 About the Authors . 26 Table of Figures Fig 1. Indian Total Installed Electric Generating Capacity as of 03/31/19 . 5 Fig 2. Indian Annual Capacity Change, FY 2012-13 to FY 2018-19 . 6 Fig 3. Indian Installed Coal Capacity, Coal Capacity Additions, Peak Electric Demand and Average Electric Demand . 8 Fig 4. Indian Total Coal-Fired Capacity and Plant Load Factor . 9 Fig 5. Indian Coal and Total Renewables Generation . 13 Fig 6. Indian Hydro, Wind and Solar Generation . 14 Fig 7. Indian Renewable Capacity and Generation by Fiscal Year . 15 Fig 8. Indian Coal and Renewable Net Capacity Additions, FY 2010-11 to FY 2018-19 . 16 Fig 9. Share of Wells Between FY 2011-12 and FY 2016-17 on Avg, Had Less Water Than in the Same Month in the Previous Year . 18 Fig 10. Total Annual Rainfall and Total Monsoon Rainfall, 2012-2016 . 19 Fig 11. Indias Freshwater-Cooled Thermal Power Plants . 21 Fig 12. Indian 2017 Auction Prices and Assessed LCOEs . 24 Risks Growing for Indias Coal Sector 4 List of Tables Table 1. Per Capita Electric Consumption Around the World . 7 Table 2. Utilization Rates by Energy Type, FY 2015-16 to FY 2017-18 . 10 Table 3. Annual Average Solar Auction Prices, 2010-2017 (Rs/kWh) . 16 Table 4. Indian Generation Lost Due to Lack of Water, 4/2013 to 2/2017 . 20 Table 5. Planned Indian Capacity Additions and Retirements . 22 Table 6. Wind and Solar Auction Prices Since June 2018 (Rs/kWh) . 23 Risks Growing for Indias Coal Sector 5 Indias Electric Sector Indias installed electric generating capacity grew from 1.7GW in 1950 to 356GW in March 2019. Of that total, roughly 55 percent is coal-fired (see Figure 1). This dramatic growth had, by the end of 2018, turned India into both the worlds third largest coal producer and its third largest importer.5 Figure 1. Indian Total Installed Electric Generating Capacity as of March 31, 2019 (GW) Note: Lignite was reported as a separate category from coal beginning in November 2018. Source: India Central Electricity Authority (CEA)6 Between fiscal year (FY)7 2012-13 and FY 2018-19, India installed 156GW of electric generating capacity, of which 53 percent (88GW) was coal-fired (see Figure 2).8 Over the same period, 53GW of renewable capacity (including solar, wind, biomass and small hydro) was added, accounting for 34 percent of all capacity additions. The remaining capacity additions were split among natural gas, nuclear and hydro. Since FY2016-17, renewable capacity additions have outpaced coal additions by more than two to one (see Figure 2). 5 Vishwanathan, S.S., Garg, A. and Tiwari, V. Coal transition in India: Assessing Indias energy transition options. IDDRI and Climate Strategies. 2018. 6 Executive Summary on Power Sector. March 2019, Table 4. 7 The Indian Government reports data according to fiscal years (as opposed to calendar years). The Indian fiscal year runs from April 1 to March 31. 8 Note that coal capacity also includes lignite, which only started being reported as a separate category from coal in FY 2018-19. For the sake of consistency, we include lignite capacity in the coal category in FY 2018-19 as well. Risks Growing for Indias Coal Sector 6 Figure 2. Indian Annual Capacity Change by Resource, FY 2012-13 to FY 2018-19 Note: Excludes diesel. Lignite is included in coal, which started being reported as a separate category in FY 2018-19. Source: Applied Economics Clinic (AEC) calculations using data from India CEA9 Historically, access to energy in India has been limited, largely as a result of widespread poverty combined with 70 percent of the nations 1.3 billion people living in rural often remote areas.10 And despite the significant growth in generation capacity, particularly since 2012, an estimated 25 million Indian households11 still lack access to electricity. Not surprisingly, improving electric access is a top priority for the country. To tackle this problem, in August 2015, Prime Minister Narendra Modi announced an ambitious plan (called Saubhagya) to electrify all Indian households by March 2019. Later, the government announced it was moving up the 100 percent electrification target date to December 31, 2018. In April 2018, the government declared that all Indian villages had access to electricity, ahead of schedule a significant national achievement. (However, the government set a relatively low threshold for village electrification defining any village where a minimum of 10 9 Executive Summary on Power Sector, FY 2011-12 through FY 2018-19. 10 Singh, R.K. Power for All in India! How Close Is Modis Goal? Bloomberg. April 26, 2018. 11 Tripathi, B. 15 Million Indian Households Have Meters But No Electricity. BloombergQuint. November 1, 2018. Risks Growing for Indias Coal Sector 7 percent of the villages homes have electricity access as being connected.12) Despite the unequivocal progress facilitated by the electrification plan, since the governments triumphant announcement of 100 percent electricity access, there have been multiple reports and survey results indicating that significant access and reliability issues remain.13 Looking at per capita usage, there has been significant growth in average residential electric consumption in India since 1980: climbing from 142kWh to 1,149 kWh in fiscal year FY14 2017-18.15 Still, Indias per capita electric use is low when compared to that of other more-developed countries (see Table 1). Table 1. Per Capita Electric Consumption Around the World Sources: Government of India and the International Energy Agency16 12 BBC News. India says all villages have electricity. April 30, 2018. 13 An internal report by the Union Rural Development Ministry (as reported in The New Indian Express) found that approximately 5,000 Indian villages still lacked electricity as of July 2018. (Source: Banakar, P. Rural electrification: Power to the people? Not in these hamlets. The New Indian Express. July 8, 2018.) A 2018 survey of 360,000 villages by the Central Rural Development Ministry found that almost 25,000 villages did not have electricity available for domestic use. (Source: Ministry of Rural Development. Government of India. Villages with Availability of Electricity for Domestic Use.) In rural states such as Bihar, Madhya Pradesh, Odisha, and West Bengal, less than 40 percent of households had access to electricity from the grid in 2018 (Source: Jain, A., Tripathi, S., Mani, S., Patnaik, S., Shahidi, T., in November 2018, it was estimated that 15 million Indian households still lack access to electricity.25 India has made significant strides in increasing electric access, but adding large-scale, centralized capacity does not necessarily improve access to electricity. In addition, electric access is uneven across the country: Indias eastern region 19 Plant load factor data from India CEA. Monthly Reports Archive Generation Reports. Fuel Wise Details Coal/Lignite/Multi-fuel. 2012-2018. Utilization rate calculations provided by Kashish Shah, Institute for Energy Economics and Financial Analysis (IEEFA). See also: Buckley, T. and Shah, K. “IEEFA India: New record with renewable energy installations 40 times higher than thermal.” Institute for Energy Economics and Financial Analysis (IEEFA). January 29, 2019. 20 In India, power distribution companies (DISCOMs) are companies that do not generate electricity themselves but purchase it from a generator and supply it to the final customer. Usually, DISCOMs are run by central and state governments, but they can also be privately owned. 21 Sushma, U.N. and Anand, N. Cheap renewable energy is killing Indias coal-based power plants. Quartz India. May 9, 2018. 22 Financial Times. Indias renewable rush puts coal on the back burner. December 31, 2018. 23 Buckley, T., agriculture, for example, relies on the monsoon rains to irrigate cropland, fill rice paddies and provide fodder and drinking water for livestock. When monsoon rainfall is less than normal, the economy suffers as farmers have weak harvests and lower-than- expected hydroelectric generation drives up electricity prices.A When monsoon rains are greater than normal, flooding can batter the economy, cutting agricultural production and impairing deliveries of key supplies, including coal, as well as negatively affecting human well-being. For example, the 2017 Monsoon flooding killed more than 1,000 people in India, Bangladesh and Nepal and affected 40 million people overall.B A National Geographic. Resource Library: Monsoon. 2019. B Siddique, H. South Asia floods kill 1,200 and shut 1.8 million children out of school. The Guardian. August 30, 2017. Risks Growing for Indias Coal Sector 13 Figure 5. Indian Coal versus Hydro and Renewable Wind and Solar Generation (GWh) Note: The renewables + hydro line includes hydro, wind and solar generation. Hydro generation data begins in January 2012 (see below). Wind and solar generation data begins in April 2015 and is missing for January 2018. Source: India CEA.32 The loss of these electricity sales during the monsoon season makes coal plants less competitive because their costs must be recovered through fewer kilowatt-hours of output, thereby raising their per kWh cost of electricity.