This is the first in a two-part series.
Money is at the heart of most fights, often because it does not come in time, or in the quantities that one had planned for. This truth lies at the heart of our NPA crisis.
A nonperforming asset (NPA) is a loan or advance where the borrower has failed to make scheduled payments of principal or interest for a particular period of time, usually 90 days after they have fallen due.
Does India have an NPA crisis? Indian banks' gross NPAs stood at Rs 10.25 lakh crore as on 31 March 2018, accounting for about 11.8 percent of the total loans given by the banking industry. Given that this is three times the global average percentage of non-performing loans to total loans, it would appear to fit the tag, “crisis”.
But what does India’s NPA-crisis have to do with climate change? We will look at the link between climate change and the current NPA crisis now (and leave future impacts — floods, agriculture, health etc. for another time).
Link between Climate Change and the NPA Crisis
The warming quality, or greenhouse effect as it is popularly known, of carbon dioxide (CO2) has been long understood. However, the recent, rapid warming of our planet has heightened public concern of the role of CO2 emissions. One of the main drivers of the rise in the CO2 emissions is the rising use of fossil fuels, including coal. Oh, more than three quarters of India’s electricity is generated by burning coal. The international community would prefer the better part of India’s coal to stay below ground. Indian development enthusiasts would beg to differ. In the stridency of their arguments, the nuances that could lead to a solution — of both climate and finance — can perhaps be missed.
The Case against Coal
Point#1: As just mentioned, burning coal plays a large role in global warming, and staying within the 1.5°C warming limit will need much of our coal to stay below ground. This has accelerated the search for cleaner sources of power.
Point#2: The marriage of solar technology, cheap Chinese manufacturing, and the reverse auctions in the Indian power sector, has resulted in plummeting solar costs, to the extent where the current solar bids are cheaper than most coal prices.
Point#3: Global animosity towards coal, has found local support because of water shortages, pollution concerns and deforestation issues caused by coal mining and coal power plants.
These are weighty (and valid) concerns. But is there a case for coal?
The Case For Coal
Point#1: Coal is (currently) the cheapest steady source of power for India. The sun shines only during the day, so solar-powered-electricity, by extension, can be generated only during the day time. If we want to power night-time electricity, we will need to store solar power which is, for now, both expensive and troublesome. Wind and hydropower are seasonal: for example, the wind season in Tamil Nadu starts by April and tapers off by September, meaning it’s not a good year-round source of power. The other types of steady (or baseload) power are gas-powered plants (atrociously expensive for a gas-poor country like India), oil powered plants (expensive, and involves imports), and nuclear (expensive, with public-fear-issues). Which leaves us with cheap, abundantly-available coal.
Point#2: The level to which coal is enmeshed in the electrical, financial and political fabric of India.
Electrical: As on 31 October 2018, India has 346 GW of installed capacity, of which, more than half — about 196 GW — is coal-powered. More pertinently, the share of generated electricity is far higher at 75 percent, and, importantly, has been growing.
Look at Figure 1.
What are the takeaways?
(a) Coal has gained share in the past 25 years, by about 15 percent.
(b) Hydro (and oil) have been the main losers — losing out to coal, and the small slivers of biofuels and wind.
(c) Solar is rounding error — its space in private equity circles (and relatedly in newspapers) is in no way representative of its share in current electricity generation. Many argue that a tipping point has been reached, however, and looking at the S-curve (where a new technology initially has low rates of adoption before rapidly gaining share, much like tracing an “S” from bottom left upwards) adoption rates of new technology, that is a valid point. In its current form, solar acts more as a catalyst for future price comparisons.
Net-Net: Coal isn’t going anywhere — it’s here to stay for a while in India’s electricity. Which makes its precarious financial underpinnings both curious and troubling.
Financial: The Standing Committee on Energy states as of March 2018, the stressed assets (NPA and might-be-NPA-soon) in the power sector amount to Rs 1,74,468 crores, relating to 34 power projects. The Economic Survey adds that over 70 percent of debt in the power sector is owned by companies with an interest coverage ratio of less than 1. This means, the earnings of these companies, after paying off all their expenses except interest, depreciation and taxes, is insufficient to pay their interest. Clearly the finances of the power sector are not sustainable.
Why is this?
One reason is that the plant load factors (or how much a plant actually runs versus how much it can run) have been falling, especially in State- and Privately-owned Coal plants (See Figure 2).
Today, at less than 60 percent, it’s no longer remunerative to operate many of these plants. The loans that were used to finance these plants thus become “stressed”.
Why are plant load factors falling?
Let’s rewind to 2003, when the Electricity Act of 2003 was passed, delicensing power generation (excepting nuclear and large hydro). The country was plagued by power cuts, and generation was woefully short of demand, and hungry for investment in power generation. In 2007, the stock markets were booming, animal spirits were running amok, India remained power-scarce, international coal prices were at all-time highs, solar was a utopian, expensive non-alternative. Money looked like it was just waiting to be made — for those with the connections to secure cheap coal supply and credit. The private sector jumped into the power sector, applying for captive coal mines to run power plants. Bids came from both those with experience in power and those who could perhaps spell the word. Banks loosened their stay-laces. And thermal generation capacity exploded (See Figure 3).
The powerful and the successful tend to see the future as the projection of the past — perhaps it reinforces their sense of invincibility. Like in many other bubbles, “irrational exuberance” in this one manifested itself in multiple ways. One was in too-aggressive bids. For instance, one of the lowest bids for power was for Rs 0.81 per unit in 1320 MW plant in Bhaiyathan, Chattisgarh (to be fair, the responsibility of getting the regulatory clearances and land was the job of the state government). Per Sourcewatch, the project was shelved in 2011.
There was irrational exuberance discernible in lending too. Some of the stressed projects in this group have Debt to Equity ratios of above 5:1, compared to the average of 3.1 for the 34 stressed projects (which means banks put in Rs 5 for every rupee the promoter did — who would care more if projects went south?). Moreover, when asked did lenders check if fuel linkages and demand was confirmed prior to sanctioning a loan, the reply provided in the 37th report of the Standing Committee on Energy by the Ministry of Finance was:
“Power sector projects involve medium to long term gestation and given the nature of projects finance, FSAs (Fuel Supply Agreement) & PPAs (Power Purchase Agreement) are crucial. As reported by banks, for entering into FSA / coal linkages, one of the pre condition[s] stipulated by coal producer / producing companies is to have firm PPA. … Discoms will not enter into PPA agreement unless the project is nearing completion and they will issue Letter of Intent (LOI) …Based on such LOI issued by Discoms, coal producing companies such as CIL will also issue Letter of Assurance (LOA) for entering the FSA ….”
Banker-speak for “Umm...no”.
Following the dramatic unfolding of the Coalgate scam in 2012, the Supreme Court cancelled 204 of the 218 previously allocated coal blocks in 2014, deeming they were allocated in a way that was “arbitrary and illegal”. The economics of the power plants that were planned with allocated-and-then-cancelled blocks fell apart — either because coal linkages no longer existed or were now far more expensive than budgeted for. Additionally, even for those with coal linkages in place, supply was not always forthcoming, because of either mining inefficiencies, law and order issues or railway logistical issues. Even those who had little to do with domestic coal, and based their plans on international coal, were in for a rude shock. Coal prices galloped upwards from 2016 to 2018 (See Figure 4). With their offtake price fixed through PPAs, it made no financial sense to continue to run the plants.
The economics of coal went south for another reason: the cess on coal, which was introduced in 2010, and then ratcheted upwards to Rs 400/tonne. Some have argued that India’s carbon tax (both in the form of the coal cess and the high duties on petrol diesel) is too high, while others say coal is already subsidised too much. The truth is that there are subsidies on both sides, which makes the real cost hard to either comprehend or act upon — there is perhaps a lesson in that.
In outright carbon pricing, in PPP terms, India has one of the highest rates of carbon tax (albeit on a single sector) in the world. The Indian power sector (and its financiers) should observe how the combination of pollution laws and carbon taxes in the UK led to the collapse of coal power in the UK. Am I saying this is a bad thing? Not at all. I’m merely saying it is something not to be ignored, and something we should prepare for, because in some sense it may be inevitable.
The Economic survey weighed into this debate arguing that the stranding risk of thermal assets should be loaded onto the social cost of renewables. Look at it another way, who pays for the written off debt on stranded coal power plants? The Indian taxpayer, via recapitalising the Indian public sector banks.
Who pays for the cess on coal? The Indian (paying) electricity consumer or steel buyer.
But is the Indian taxpayer or electricity customer complaining? Not about this at any rate.
Which brings us to the political economy of coal and power (the electrical kind).
Read part II here.
The writer is the founder of the Sundaram Climate Institute, cleantech angel investor and author of The Climate Solution — India's Climate Crisis and What We Can Do About It published by Hachette. Follow her work on her website; on Twitter; or write to her at email@example.com.
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Updated Date: Feb 22, 2019 10:12:29 IST