First Modi Budget Gives Coal a Risky Boost

by Kim*

Communities living in the shadow of the Tata Mundra UMPP (Photo: Joe Athialy)

Communities living in the shadow of the Tata Mundra UMPP (Photo: Joe Athialy)

Is the Indian government putting its promise to electrify India at risk by relying on dirty energy just when coal is losing the battle with solar?

The first Modi budget included the announcement of a number of Ultra Mega Power Projects (UMPPs) and saw India’s coal minister talking up a tripling of Indian coal mining to 1.5bn tons per annum by 2020.

There are multiple barriers to building new UMPPs and delivering enough coal in India. Because successive governments have over-relied on coal, there are too many coal plants for the amount of coal available. For example only 40% of plants had as much as a week’s supply of coal over the Autumn, resulting in yet more electricity supply problems.

In the last five years Coal India (CIL) has consistently failed to meet its production targets. If it did increase production, the first users would be existing plants – making new plants unnecessary according to CSE’s latest study. In economic terms this will just make the situation worse for UMPPs which have, anyway, turned out to be much higher cost than expected – leading utilities to push for increased tariffs in a bid to turn a profit. No wonder private sector interest in UMPPs has waned. Of the 16 UMPPs announced by the government in 2005, only two have been built, and one is under construction. The latest two offered to investors, Cheyyur (Tamir Nadu) and Bedabahal (Odisha) UMPPs, had to be withdrawn after they failed to attract sufficient interest.

Screen Shot 2015-03-11 at 2.59.46 pm

Those that have been built have also been heavily criticised for their social and environmental impact. And a new dash for coal will only confront project developers with growing problems of public acceptance – due to the direct damage of these dirty development projects and also because of the dramatic rise in air pollution they will cause.

But the government appears, for now, to have discounted the risk that its coal expansion will not turn up. And they have also discounted the risk that their large and difficult coal projects will be more costly than renewables by the time they come on line.

 The government’s promised “Saffron Revolution” to scale up renewables by 175GW has generated great excitement and will certainly deal terminal damage to the economics of new coal projects. But making this happen quickly requires action and the budget disappointed the clean energy sector, which is looking for practical changes to get things moving. Shares in clean energy companies dropped as a result. This budget could have made a strategic error by not giving the right signals to the markets that the “Saffron Revolution” is going to materialise quickly. This means Indians will have to wait longer for electricity, because one thing renewables have shown around the world is that they can scale quickly and, increasingly, cheaply.

Deutsche Bank reportsC172799F-0891-46C1-BBD9-250C68CFF189 that 30 countries are, today, delivering solar at a discount on retail prices (unsubsidised) and it expects 30-40% cost reductions yet to come, bringing disruptive effects to coal generation. This graph shows Deutsche Bank’s assessment of retail cost parity in a selection of countries.

Utilities in India are pushing for increased tariffs so their coal plants have a chance of being profitable.  But all that does is expedite the inevitable shift to wind or solar, which are already cheaper than imported coal in some parts of India. Renewables have proven they can scale to meet electricity needs quickly. For India renewables look like a far less risky option for delivering affordable electricity for all than complicated and dirty coal. Maybe this will have sunk in by the next budget.

Kim is an international energy analyst following the coal sector and blogging here in a personal capacity