Day 6 - IEA projections of energy in India, cont..
Continued from the previous post, here are the remainder of the questions
5. What is the role of coal imports in India’s energy mix in the NPS? What are the assumptions that go into it and what challenges it presents?
IEA surprisingly emphasises on coal imports and foresees a rising demand for imports. It states - Indian coal import dependency has trebled over the last decade, reaching 30% in 2013. The share of imports is projected to increase further, peaking at 38% (in energy terms) around 2020, however, by 2040 it returns to today’s levels as Indian domestic production takes a higher share of incremental demand. This seems to go completely against the recent statements made by the power minister Piyush Goyal on cutting down coal imports to zero by the end of this decade. Whist either of them aren’t fully true, it is safe to expect that coal imports will not be as high as the IEA projects.
Another reason for imports is the expectation of parity between domestic and international/sea borne coal. Currently, thanks to subsidies from the Government, 80% of the power generation cost is absorbed by the utilities which are currently debt strapped. The cost of domestic coal is roughly 40$ a tonne with an additional 5-7$ for rail transport. Imported coal on the other hand can cost anywhere between 60-80$ a tonne. Achieving parity through reduced market distortion because of subsidies will allow for greater imports to be competitive in the Indian market. Alternatively, CIL has been reaping considerable profits of e-auctioning a part of its coal online at much higher prices. In 2015-16, CIL sold 58 million tonnes of coal through the e-auction, raising $373 million after selling at a 11% premium.
Indian coal is dirty with very high ash and sulphur content and low calorific value. Indian coal generates roughly 3500-5000 Kcal/kg, much lower than better quality coal from Australia or China. Every tonne of coal from Australia requires 1.5 tonnes from India to generate the same energy. On average, every tonne of coal that is transported by rail travels about 500 km’s and leaves a trail of pollution in its path. India also imports a large amount of coking coal for its iron, steel and cement plants from South Africa. If the economics of imported coal better aligns with domestic coal costs, then India might even witness a further rise in imported coal.
With India being seen as the last great source of demand for coal, we could potentially witness export countries directing their coal for India, offering reasonable incentives to establish long term trade. Economics of imported coal will of course be the main arbiter.
6. What are the constraints with coal supply in the NPS?
a. Obvious constraint is the fact that a majority of coal which is extracted through surface mining, requires large tracts of land and results in forest felling and displacement of people living on those lands. The current Government is keen on exploiting these resources and has identified 849 more coal blocks across the country for mining to reach the 1.5 billion tonne target. The ministry of environment and forests and the tribal ministry have expressed concerns and have shown that more than half of these blocks (449) fall in inviolate zones because of their proximity to river basins and streams. The coal ministry is not keen on leaving the matter and insists that only 49 blocks are inviolate and the rest have to be opened for mining. This would entail diluting the current rules of mining which leaves a buffer of 250 meters from a river for mining which is now being reduced to 15.
Rail networks have been an impediment for coal transport. Given the location of coal concentrated in a few parts of the country (Telangana, Andhra, Jharkhand, Odisha, Chattisgarh dominate the sector with more than 60% coal coming from these 5 states); coal traveling through rail on average cover a distance of 500 kms. New rail lines are being added every day and over the last two years, dramatic progress has been made on transporting coal and honoring the fuel supply agreements with power generators.
Currently, the country is facing an over supply issue with coal that is being stockpiled and not being utilized at coal plants owing to a major water scarcity issue. Coal plants amounting to 12 GW had to be shut temporarily for lack of water and this reduces the amount of coal that is needed.
Coal imports, as seen earlier, might play an important role if the economics of foreign coal works in favor of the indian power sector.
7. What are the implications of this demand/supply on land, air pollution, environment, climate change and other key factors?
A. The profound increase in energy demand and supply has dramatic impacts on the social and environmental aspects of the country. In the New Policies Scenario, the carbon intensity of India’s economy improves substantially, but India’s emissions rise from 1.9 gigatonnes (Gt) in 2013 to 3.7 Gt in 2030 and around 5 Gt in 2040, meaning that emissions per capita converge towards the global average (3.2 tonnes of CO2 per capita in India in 2040, versus a global average that edges downwards to 4.1 tonnes of CO2 per capita) (Figure 14.3). This increase in emissions means that India is the largest single contributor to the rise in global emissions over the projection period.
In the above graph, India is expected to have very low emissions intensity, thanks to improvements in energy efficiency.
CO2 emissions from power generation in India grow nearly two-and-a-half-times over the Outlook period, reaching 2.3 giga-tonnes (Gt) in 2040 (up from just under 1 Gt in 2013). The share of the power sector in the country’s total emissions decreases from half today to 45% in 2040. Renewable energy deployment and the use of more efficient coal-fired technologies bring the CO2 emissions-intensity down by 30%, from 790 grammes of carbon dioxide per kilowatt-hour (g CO2/kWh) to 560 g CO2/kWh. With 45% of the total emissions coming from the power sector, it has serious implications on future investments and the potential for stranded assets.
There is no direct assessment of land requirement over the next 25 years but a acknowledgement of the fact that land acquisition is a difficult, messy process that has been recognised as a hindrance to rapid expansion of coal. As mentioned earlier, Government policies are being put in place to dilute land acquisition norms, for instance, the Government is working on reducing the influence of the gram sabhas, the local Government, in deciding the fate of an infrastructure project in their area. The concept of eminent domain is invoked when acquiring large tracts of land.
The graph below shows the potential rise in air pollutants in India in the NPS. Energy production and transformation is expected to contribute majorly to pollution. With air pollution becoming a serious issue in the capital city Delhi and few other cities, coal is set to add to it dramatically. Very little assessment has been done on the potential for air pollution on neighbouring countries like Sri Lanka, Bangladesh through air dispersion models and the potential implications of that.
8. What are the projected costs of energy in the NPS? specifically for coal and renewable energy? what assumptions go into it?
A. There are various costs involved in coal. Coal mining (domestic and foreign/production and consumption), Coal plant construction - land acquisition, fuel supply linkages, resettlement and rehabilitation; transmission and distribution lines; network charges or integration charges. It is difficult to individually assess the various costs involved in coal and therefore certain indicators are taken to estimate the cost of coal.
In the New Policies Scenario, average Indian mine-mouth coal prices are set to increase over the Outlook period from around $40/tonne in 2013 to $60/tonne in 2040 (adjusted to 6 000 kcal/kg). Upward pressure comes from rising mining costs, but also from the increasing use of market-based instruments to determine prices – for example, the more widespread use of auctions for linkages – leading to a convergence over time between domestic and international prices. The graph shows how domestic mine-mouth price (price per tonne before transportation of coal) is on average $40 while imported coal is over $85.
The above graph shows the average cost of energy delivered (i.e. mine-mouth+transport+other infrastructure costs; could also be considered as the Lcoe) upto 2040. The average cost of power generation increases from around $65 per megawatt-hour (MWh) today to just over $70/MWh in 2040 (Figure 12.23). Despite the multiple benefits that come with the deployment of non- hydro renewables – chiefly solar PV and wind power – they put upward pressure on India’s power generation costs. India is an evening peaking system and therefore, despite abundant sunshine, solar PV does not have a significant capacity credit. Consequently, solar PV primarily displaces conventional generation during the daytime – saving fuel costs – but reduces only slightly the amount of dispatchable capacity needed to serve the evening peak. Some similar observations are true for wind power, although its capacity credit is slightly higher. As a result, in 2040, non-hydro renewable energy accounts for 19% of the average cost of power generation, slightly above its contribution to the country’s output.
It is again quite unusual to see that non-hydro renewables are in fact expected to drive up energy costs. The IEA states the following about coal fired power - “Coal-fired power generation costs decrease over the Outlook period, despite increasing coal prices and deployment of more capital- intensive technologies, as upward pressures on these costs are contained by the marked improvements in conversion efficiency realised over time. Coal-fired power contributes substantially more to output than to overall costs, helping to keep electricity tariffs affordable for consumers in a period when India is adding more costly sources of power (although the falling technology costs of solar and wind reduce this effect over time).” It is unclear how the fact of an evening peak in demand contributes to an upward pressure on costs from renewables. It assumes a differential pricing of power with prices going up as demand rises and meeting peak demand offers greater returns. But that isn’t the case in India as the tariff is set by the Government which absorbs the losses. Assuming that preferential tariffs are removed under the NPS, efficiency improvements, economies of scale, improvements in battery storage and other factors will dramatically reduce the cost of solar and wind energy; affecting an overall reduction in energy costs.
The above graph shows the levelized cost of electricity from renewable energy. It shows how utility scale solar will be higher than average generation costs by 2040 with around $105 MWh by 2020. This is a gross underestimation of the Lcoe of solar energy. Current estimate of lcoe in India are around $80/mwh, far below the 2020 estimates. At this rate, the lcoe costs of solar will fall further, putting a downward pressure on average power generation costs as opposed to the other way around that the IEA predicts.
The above graphs shows the power generation costs in the NPS by 2020 and 2040 for non-oecd countries. Two key points here are that the low contribution of capital recovery is an indication of the fact that a large majority of the plants are old and expected to recover their capital soon. Renewables on the other hand have a larger recovery period but very small cost of fuel and O&M. This has implications for the volume of potential stranding of assets.
India’s coal fleet is very new and few are expected to retire anytime soon, this results in a sizeable amount of capital investment that needs to be recovered over the lifetime of the asset. But as the graph suggests, the fuel costs over this period will be much higher than capital costs. CO2 costs suggest that increasing number of non-oecd countries will adopt carbon regulations with a rising cost. The graph also suggests a convergence of costs around an average cost of around $60/mwh. This doesn’t fully explain the reason for greater presence of coal in the energy mix compared to non-hydro renewables. It could be a case of technology lock-in with existing assets that continue to run for a long period of time but that assumption is again negated by the fact that India for instance is expected to add 197 GW of coal capacity between 2025-2040, out of a total of 584GW in that period. This figure seems highly contentious and doesn’t seem to factor in the costs of renewable energy over the next decade.
If fuel costs are going to constitute roughly 50% of the total power generation cost from coal, fluctuations in prices will have a dramatic impact on the producer. If domestic prices are allowed to reach parity with international coal prices, then power generation costs with go up substantially, it is unclear what implications this may have on the end consumer prices both in the case of subsidies and without it.
It is useful to note here that the electricity prices to the end-user are strongly influenced by the structure of markets and the degree of regulation, but the dominant determinants are the wholesale price for electricity, the costs related to transmission and distribution (including losses), retail costs, and any subsidies (paid by consumers) and taxes. Wholesale electricity prices must be closely tied to the underlying power generation costs in both competitive and regulated markets in the long term to ensure the adequacy and reliability of the power supply.
9. What are the existing investments in energy and its future projections?
India has invested roughly $77 billion since 2000 till 2013 in providing its energy supply. As can be seen, the power plants, T&D lines and coal mining combined amounts to roughly 80% of the investment.
Since 1990, investments worth $330 billion have been made through public-private partnerships, of which over 40% were in the energy sector. In the last five years, India has had the highest amount of infrastructure investment co-financed with the private sector among the low and middle income countries (OECD, 2014)
Since 2006, 6 GW out of every 10 GW of net capacity added to the grid has been financed by private investors, whose share of generation has increased quickly, to reach more than one-third of the total (Figure 11.19)
India is projected to invest $730 billion cumulatively in the power sector between 2015-2025. $301B of it into T&D whilst $429B of it into power plants and mines. Further $1392 billion cumulatively is expected to be invested into the power sector between 2025-2040, with $544B in T&D and $848B in power plants and mines. Out of a total of $19.7 trillion expected to be invested in the power sector around the globe, India constitutes roughly 12%. Renewable energy investment is expected to constitute 62% of the total investment but yield less power generation than coal. (WEO 2015, Pages 320,321). This might be considered a simple argument against stranded assets where greater investments into renewable energy is in fact resulting in lower energy.
The graph below breaks down the investment across different energy sources and across 5 year cycles in the coming 25 years. -
There is strong reliance in India on – and preference for – loans from the banking system, rather than capital markets: corporate lending from banks (as opposed to bonds or securitised loans via the capital markets) accounts for well over 90% of external financing (Group of Thirty, 2013). While the Indian capital markets have many listed companies, relatively few are actively traded and tapping these markets for funding is typically an avenue followed only by the very largest Indian companies (Didier and Schmukler, 2013).
However, bank loans are not generally a good match for the long-term needs of energy investment projects. More than 80% of loans outstanding from the Indian banking sector have a maturity of less than five years. The market for corporate bonds – which typically have a longer maturity – is relatively under-developed in India and has a capitalisation of only 5% of GDP, limiting its ability to supply long-term financing (OECD, 2014). There are also banking regulations and guidelines from the Reserve Bank of India that direct credit to various sectors and influence interest rates and the other conditions for lending by banks: a surge in the demand for investment into renewables or other generally more capital-intensive energy technologies might lead to difficulties because of sectoral risk clauses that limit the exposure of lenders to individual sectors.
10. Finally, what implications can we draw for stranded assets of thermal coal in India?
Several lessons can be drawn from the IEA’s assessment of the Indian energy sector (primarily coal and renewable energy)
a. IEA flirts with the question of the possibility for solar and wind energy to substitute coal. It offer a few reasons why it sees this scenario to be highly unlikely.
a1. Base load and peaking capacity. IEA does not see India, an evening peak country, to have its base-load or high peak demands to be met by solar energy. If India pursues the projected energy demand of 4.2% a year to meet its 6.5% GDP growth, then the IEA sees it highly unlikely for renewable energy and energy efficiency to plug the massive energy supply gap.
a2. Low capacity factors and high capital investments is another reason for solar and wind energy to remain uncompetitive with coal.
a3. High variability or intermittency of solar and wind energy make it unreliable for meeting large loads. Variability can be managed but the various options that improve system flexibility and so limit the need for thermal capacity (strengthening the grid, demand-side management and investment in electricity storage) all have their own regulatory or cost challenges
b. The IEA sees the possibility of coal being overshadowed by a much greater role for natural gas and the alignment of four key factors as stated below
b1. A reform to domestic coal pricing in India. As things stand, domestic production is sold to power generators at prices that are well below import prices. This artificially increases the attractiveness of coal, making it very hard to out-compete. Bringing the coal price up to import parity, either through deregulation or a rise in the administered price (collecting the associated rents via taxation), would help to swing the choice in favour of higher efficiency coal-fired generation technology and help the investment case for gas. Carbon pricing would reinforce this effect. But the elimination of subsidies would be a first step.
b2. Avoiding a strong rebound in LNG prices. This is not an area in which Indian energy policy has great sway (although policy-makers could do much to create conditions for a more competitive traded gas market at home, and Indian companies are increasingly prominent investors in LNG projects abroad, notably in East Africa). But sustained LNG prices in single digits would considerably ease the path for gas in the power generation mix.
b3. Achieving cost-efficient investment in renewables. The average investment cost of the renewable portfolio is a key component of the competitiveness of the “renewables-plus-gas” option. India has high potential for wind and solar, but international experience suggests that the regulatory and licensing environment, grid connection and local content rules, and the operation of local equipment and service markets have a major impact on investment costs.
b4. Preferential costs of capital for renewables. Even if these first three conditions are met, we estimate that the total costs of baseload coal remain difficult to beat without government support. For example, the “renewables-plus-gas” option becomes more attractive if there is a substantial difference in the cost of capital, favouring renewables. This is possible, but would require direct government intervention. From India it requires a regulatory regime that creates sufficient security and predictability to enable lenders to lower their cost of capital, and efforts to unlock new sources of long-term finance, for example via domestic capital markets. From the international community, conscious that the carbon intensity of India’s power generation is a critical barometer of the success or failure of global climate policy, it requires a framework to channel low-cost financing to low-carbon investment in India.
c. For analysing the potential for stranded assets of thermal coal, beyond the influence of climate policy and considering the role of competitive market factors; three of the four factors above can be achieved. It will, as stated, be very difficult for the Indian Government to influence the price of natural gas given its high reliance on international markets and low domestic capacity. Capital costs of solar and wind have come down dramatically, storage costs have reduced and greater capital is being invested in renewable energy yoy than coal.
Integration costs will be another factor that hasn’t been considered thoroughly yet. As India adds more variable energy to the grid, the potential of curtailment is quite high. It is another risk that questions the potential of renewable energy to displace coal.
d. It is estimated that 100 GW of solar energy by 2022, the target set by the country, will reach 8% of the total energy demand by that period. Currently, Germany, which is considered a leader in solar energy has 7.5% of its demand met by solar.
