Drag of thermal power plants on PSBs

The government's announcement to soon tender out 100 GW of solar power in one go is somewhat an ambitious step towards transition to clean energy, compared to the previous largest tender of 10 GW – which is likely to be opened in July.

The new tender has provisions for boosting domestic module manufacturing and energy storage capacities as well – absolutely essential in light of likelihood of renewables to outpace coal in new power capacity. India has thus expressed its resolve to shift its energy development trajectory from fossil-based resources to renewables.

This latest announcement lends further credence to the Power Minister's claim that India will overshoot its 2022 target of 175 GW of installed renewables. Whether the target is overshot or net additions fall just short, the government's periodic impetus for renewables in India shows that it is indeed committed to honoring the 2015 Paris Agreement.

However, it is a matter of serious concern that the imprudent decisions during the last decade or so to take up an unduly large number of coal-based power projects over and above the demand projections made by erstwhile Planning Commission and the huge time and cost overruns in implementing those projects have not only brought many PSU financial institutions under stress but also potentially neutralised the benefits expected from renewables.

PSU banks have been forced to divert their credit for refinancing the delayed coal-based projects rather than providing credit for projects based on renewables. In 2017 nearly 17 GW of coal-fired thermal power was re-financed and/or extended new financing by the public sector at a cost of Rs 60,767 crore ($9.35 billion).

Latest figures suggest that 40,130 MW (20.3 per cent) of India's 199 GW of thermal power capacity has been classified as stressed assets; 2,520 MW of this is currently facing liquidation, while 10,430 MW may soon be headed that way as no power purchase agreements (PPAs) are in place.

Even existing coal-based power projects are operating at low Plant Load Factors (PLFs), imposing heavy costs on state power utilities. One reason for this is that the off-peak demand for electricity is not sufficient to allow the excess coal-based generation to operate at full capacity.

There are other reasons for this situation. Coal-based power generation is becoming non-competitive in the face of sub-INR 3/kwh tariffs discovered for utility scale solar and wind power. The massive new tender for new solar capacity will further aggravate this problem for coal-based plants. In some cases, the absence of reliable fuel supply contracts and bottlenecks in coal transportation have also resulted in coal-based plants running at low PLFs. It is unlikely that these constraints will get resolved soon.

The trend is, therefore, painfully obvious: Coal-fired power is increasingly becoming uncompetitive against renewables, and its future prices – after factoring in increasingly costlier coal imports and compliance with tightening emission norms – are only likely to inch upwards. Politico-economic considerations being what they are, higher costs of coal-based power lead to larger subsidies for electricity end-users, which imposes a heavy burden on the public exchequer.

Adding to the quagmire is the fact that coal-fired power plants have led to large-scale displacement of rural families, disrupting their livelihoods. Burning of coal, in the absence of effective regulatory oversight, has adversely affected the health of local communities, leading to larger expenditure on public health schemes.

In the normal course, financial institutions would have exercised prudence and refrained from extending credit to coal-based power projects in view of their declining viability and the uncertainty in the recovery of loans. It is therefore somewhat inexplicable that they should continue to invest heavily in coal-based power capacity, especially at a time when they are saddled with huge NPAs, especially power sector NPAs.

While private sector banks have a marginal role in this, it is the PSU banks that face this problem. If they continue to extend credit to unviable projects, would it not necessitate recapitalisation of the PSU banks from out of the tax-payers' money and jeopardising the interests of the public shareholders?

Globally the trend is quite the opposite. Prominent insurers such Lloyd's (UK), Allianz (Germany), AXA (France) and Dai-Ichi (Japan) have already announced their termination of insurance for coal-fired power and coal mining. Divestment from coal is also being pursued by ING (major Dutch financial institution), the Norwegian government's $1trillion pension fund, the Asian Infrastructure Investment Bank (AIIB) and to an extent, the World Bank.

Even at the recently concluded G7 summit, institutional investors (including wealthy private firms) together worth nearly $26 trillion in global assets urged the leaders to phase out coal-fired power generation. Surely, they would not have done so if they saw no trouble in remaining invested in coal. Of course, for them returns on investment may be a more pressing concern than tackling global warming, but the two goals are not mutually exclusive.

What then, is driving India's public sector financing for coal-fired power? And to what end? Are we so infatuated with relentless economic growth that we completely ignore coal-fired power's debilitating impacts on our financial institutions, our citizens' health and the world's precariously low carbon emission allowances? Apparently, there are other than prudent considerations which are compelling the government to persuade PSU banks to finance coal-based power.

By: EAS Sarma
(Writer is a former Secretary, Ministry of Power and Ministry of Finance, and also served as Energy Advisor to the Planning Commission)