Several studies indicate that coal is losing its charm in India. The global trends indicate that global capital is fleeing coal. In such a scenario, is it a smart move for India to open commercial coal mining to 100 per cent FDI?

The Indian power sector is under huge stress and struggling with issues across the value chain: thermal generation exposed to a huge non-performing asset (NPA) burden of over Rs 10 trillion ($144 billion) as of FY2018; an inadequate transmission network leading to grid congestion and curtailment; and, increasing indebtedness and the deteriorating financial health of distribution companies (discoms). Support for the under-recovery of discoms selling electricity at below-market prices, usually for residential and agricultural users, was the single-largest source of energy subsidy expenditure in FY2017: Rs 74,925 crore ($11.2 billion).

In particular, thermal power plant developers are under huge pressure. Capacity utilisation rates have been below 60 per cent over the past two years, combined with excessive financial leverage that makes debt servicing extremely difficult. Further, late payments by loss-making DISCOMs and renegotiation of tariffs on power purchase agreements (PPAs) have added to the woes of developers, resulting in a double whammy that is clogging up the banking and power sectors alike. Currently, the discoms’ dues in the renewable sector alone amounts to Rs 9,735 crore ($1.36 billion).

According to a report by Institute for Energy Economics and Financial Analysis (IEEFA) and the Applied Economics Clinic (AEC), India’s coal-fired energy sector is facing increasing pressure due to generator over-capacity, water shortages and the rise of low-cost renewables. The report recognises the boom in coal plant construction during the early 2010s, resulting in significant over-capacity. The issue of declining water supply is also crippling the sector. At the same time, renewables are already cost effective, and the cost difference between renewables and coal will widen as time goes on.

This is consistent with a recent Central Electricity Authority (CEA) study that estimates the optimal generation capacity mix under various technology scenarios, including the issue of intermittency associated with renewable energy sources and other constraints, to meet electricity demand in FY29/30. According to the CEA, installed capacity and the generation mix is changing, and the optimal mix will be for thermal capacity to decline, while the share of renewable energy increases.

The five-year vision document prepared by the Ministry of Power and the Ministry of New and Renewable Energy for reforming India’s power sector are also in sync with the above studies. With falling plant load factor (PLF) and stressed assets, the report suggests to shift away from generation towards efficient supply and optimum generation mix. Further, it stresses that the capacity allocation of transmission infrastructure should be aligned with growth in renewable energy projects. The document also talks about facilitating lending to the renewable energy sector.

The tide is changing, and India is witnessing transition of energy investment, with renewable energy attracting more private capital compared to fossil fuels. A recent study by Centre for Financial Accountability (CFA), analysing 54 energy projects for coal power and renewable energy in 2018, found that 80 per cent of the total lending of Rs 30,534 crore ($4.4 billion) was attributed to renewable energy projects.

Coal fired power projects received a meagre 20 per cent of total lending, with primary finance to coal power shrinking by 93 per cent compared to its 2017 value. In 2018, most coal fired project loans came from majority-government and government-owned financial institutions. Majority-privately-owned commercial banks contributed 75 per cent of all finance towards renewable energy projects.

These studies indicate growing consensus that coal is losing its charm in India. In such a scenario, is it a smart move for India to open commercial coal mining to 100 per cent foreign direct investment (FDI)? The global trends indicate that global capital is fleeing coal. Over 100 globally-significant financial institutions have divested from thermal coal, including 40 per cent of the top 40 global banks and 20 globally significant insurers. In this context, it could be challenging to attracting foreign investment to a declining sector when India’s economic growth is slowing and global investors are shying away from the dirtiest fossil fuel.

The government should channel its resources to greater off-take of renewable energy in India. This would in turn require grid strengthening, improved interstate transmission capacity, and ideally a stronger price signal to incentivise peaking power supply to reward fast ramping and on-demand peak supply.

India also needs additional storage and demand side measures to supplement the increasing share of renewable energy into the grid. India will then able to address the issue of air pollution, adverse impact on health and quality and reliable supply of energy effectively and avoid climate disaster.

Vibhuti Garg is a senior energy specialist with the International Institute for Sustainable Development (IISD) and an energy economist with the IEEFA. Views are personal.

The article appeared in Moneycontrol, can be accessed here.