India’s coal bubble is perilously close to bursting.
This week the Indian court system handed down three landmark energy rulings. While an ultimate decision still looms, the combined weight of these initial rulings reaffirms one thing -- it’s time to diversify away from coal.
Of the three rulings, the most talked about came in response to public outrage over sweetheart deals for private mining companies that provided access to coal mine leases for next to nothing. The discovery of these backroom deals -- now referred to as the ‘coal gate’ scandal -- has rocked the Indian government, and the coal sector, for well over two years. The court’s ruling found that 218 of these leases were illegal, in a sweeping verdict that affects all mine leases issued from 1993 through 2010.
The court is set to decide whether the companies awarded these mines will be fined or whether they will lose the mines entirely on Sept. 1. Regardless, the signal the court has sent both the coal industry and the Indian government is that it is time to start over and only allocate energy resources -- like coal and coal mines -- in a transparent and fair manner. No matter how you slice it, that means increased costs.
The fallout was immediate. Most notable was the financial community’s reaction to concerns over billions of dollars that could be lost in bad loans issued to stranded assets. Indeed, with 8 percent of non-food lending exposed across the banking sector and billions invested in 37-gigawatts of new coal-fired power plants in Odisha alone, the fallout could be all too real.
The irony here runs thick. The “coal gate” scandal that birthed this verdict began under the previous Prime Minister, Manmohan Singh, and was really the epitome of all corruption scandals -- though there were quite a few.
In fact, “coal gate” has been a major issue facing the current Prime Minister, Narendra Modi. Despite bending over backwards to fast track coal projects, Modi’s administration now faces serious setbacks to advancing coal power. Thats because while the courts ruling doesn’t end coal expansion, it does potentially push the reset button -- a death knell for dozens of coal projects hanging by a financial thread. In addition, that reset will force coal miners to competitively bid for new mines which will only raise fuel prices for an already financially struggling sector.
As bad as this news for the coal industry was, it’s the second ruling from the Supreme Court that has delivered the one-two punch that may hurt the coal industry most.
While most of the country was focused on the final stages of the engrossing coal gate scandal, the court handed down a new verdict in response to pleas for a bailout from the Tata Mundra Ultra Mega Power Plant (UMPP)and other coal-fired power plants struggling with rising coal import prices. Initially, Tata low balled its construction bid in order to win the project by underestimating the price of volatile and uncertain foreign imports. But this strategy backfired as coal prices rose so high that they now threaten to make the Tata Mundra coal plant, in the words of the Tata Mundra CEO, “financially unviable.”