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August 15, 2011

Sierra Club India: Coal is Cheap? World's Largest Coal Plants Bankrupted by Skyrocketing Prices

India Coal Plants Against the backdrop of India's struggle against coal, a new phase of India's coal crisis is quietly unfolding. The skyrocketing cost of imported coal is wreaking havoc on the financial solvency of the country's coal plants.

Two of those coal plants, Tata Mundra and Krishnapatnam, happen to be some of the world's largest (at four gigawatts each they are the equivalent of 16 average sized coal plants) and now face halted construction and mounting losses. While they are the first, they are unlikely to be the last, as the skyrocketing costs of coal force a day of reckoning for those who painted global coal supply lines as cheap and reliable.  

The proximate cause of the crisis was a government decision to raise coal export prices to international standards. International prices have in fact doubled over the past four years, which is exactly what Indonesian coal prices did in the wake of the decision. This single decision has now reverberated throughout the Indian coal industry, shaking private coal plants to their core.

Benchmark prices
Stranded Assets

The first victim of the Indonesian price rise was the gargantuan four-gigawatt Krishnapatnam plant in Andhra Pradesh. The effect of the price rise was so great it stopped construction of the plant in its tracks. This is welcome news for the local movement struggling to oppose a plant that has been at the heart of a people's resistance. This resistance is opposing 56-gigawatts of proposed new coal fired power in Andhra Pradesh's coal rush.

The next domino to fall was the scandal-plagued, IFC-funded, four-gigawatt Tata Mundra plant in Gujarat. There, the price rise forced Tata to seek a government bailout that would allow it to double the price it charges for power. So great is the effect however, that it faces a whopping 270% in annual losses. Even with the requested price revision the project will not be financially viable over the next five years. 

As if to add insult to injury the security of their coal supplies was further strained when a shipment of 60,000 tons of coal sunk off the coast of Mumbai the same week.

Hitting the Panic Button

With a whopping eight gigawatts of coal-fired power now directly affected, and a coal crunch threatening 42 gigawatts more, lenders are hitting the panic button. The Central Bank of India has an exposure of ~$6 billion to new coal projects. While M V Nair, the chairman of public sector Union Bank of India, has warned, "This could turn some of them (coal plants) into non-performing assets" (otherwise known as financial boondoggles or money pits). 

Their concern extends to the 50% of outstanding loans that have been drawn from banks for new coal plants but unable to secure coal supplies at affordable rates. Given the incredibly risky situation, banks are seeking stringent assurances of coal supplies and other forms of loan guarantees to ensure that these capital intensive projects don’t go belly up.

It is highly likely that the fallout from this crisis will rapidly spread as the government is planning to get up to 57% of its coal supply from overseas (PDF). However, just like the roadrunner cartoons, many private power producers and Indian State Agencies have yet to realize that the rug has been pulled out from under them. They continue to seek international mines to shore up supplies despite skyrocketing costs that are increasingly exacerbated by political risks.

The panicked state the Indonesia law has created is best summed by the desperate statement of India's largest power plant operator National Thermal Power Corporation (NTPC): "Our first priority is not to acquire coal mines and make money, our first priority is to secure fuel."

Despite their mad scramble, more and more large coal mine deals are falling through due to increasing prices and political risk. This has not deterred India from looking to South Africa, however, despite threats of nationalization of the country's mines - a situation that, were it to occur, would threaten a far worse crisis than the Indonesia debacle.

The Specter of Chinese Demand

Looming in the background is the Chinese ability to further raise prices of imported coal due to the sheer size of its demand. China itself is experiencing a growing energy crisis leading to soaring domestic coal prices. This in turn increases their demand for imports thus pushing up prices. Indeed China went from a net exporter to a net importer in a single year, which had a dramatic knock-on effect for imported coal prices across Asia. The end result is that Indonesia’s price revision is likely only the beginning of soaring coal prices for the region.

China mine prices
A Learning Moment

With fuel accounting for anywhere from 40-80% of the cost of electricity generated by an Asian coal plant, the myth of cheap coal powering India's economy has now burst. At the same time large investments in cheap renewable energy are emerging epitomized by India's Solar Boom; These energy sources will only decline in cost in the years to come.

The path forward is clear, the only question is whether Indian policymakers will fail to see it in the near term. Doing so will ensure that they throw good money after bad by providing bailouts (via financial support or tariff revisions) to these failing assets and locking the country into unsustainable subsidies for decades to come. This of course will only exacerbate the threat coal poses to Indian economic growth and security.

If there is any doubt as to the path forward, perhaps they can learn from the glaring mistakes of another large democracy faced with a similar opportunity to cut dependence on an expensive addiction to an insecure global fuel line (see United States reaction to Oil Embargo 1973, Oil Crisis 1979).


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