One year ago we posted here comes the sun – a blog which found the lowest solar bid of 2017 could be less than the cash cost of nearly a third of India’s existing coal capacity. This blog updates these findings and outlines what to expect in the future.

In a Bloomberg interview earlier this week India’s Power Secretary, Ajay Kumar Bhalla, stated that around 40 gigawatts (GW) of coal power capacity assessed by the government is seen as “stressed”. Of the 40 GW about 10 GW is considered unviable. Details about the coal units being assessed are unclear.

Bhalla told Bloomberg: “We have initially looked at 40,000 MW [megawatts] of coal-based capacity. About 10 percent of that has been resolved and 20,000 MW is under discussion of what SBI [State Bank of India] and other lenders are looking at. About 8,000-10,000 MW of the capacity we think is beyond resolution as there is hardly progress in those projects.”

Stressed power assets hold nearly Rs 1.8 lakh crore ($28b) in loans, which may turn bad without being restructured. According to Bhalla, the Power Ministry and the State Bank of India are working to resolve regulatory issues so that the assets can be restructured.

There is no doubt that India’s dysfunctional power markets make for a challenging investment environment for all power generators. The reality, however, is coal has been under significant economic pressure for some time. At the heart of coal’s woes is the growing competitiveness of renewables.

As detailed in here comes the sun, super aggressive solar bids are shining a spotlight on the economic shortcomings of coal. Here comes the sun found the lowest solar bid of 2017 could be less than the cash cost of around 60 GW of operating coal capacity. The figure below shows the situation remains challenging for coal generators, despite a significant year-on-year rise in solar bids.[1] Of the 214 GW of operating coal capacity, around 32 GW could have a higher cash cost than the lowest solar bid of 2018.

Cash and operating cost of India’s coal capacity versus the lowest solar bid of 2018

Source: Economic Times, Carbon Tracker analysis

While regulatory reforms may offer some respite to generators – principally ensuring they are paid on time – looking ahead the fundamentals for coal power in India remains bleak. The government’s focus on domestic production often equates to more expensive travel costs as generators compete for space on an already overcrowded railway network.

Moreover, new environmental norms issued by the Ministry of Environment, Forest and Climate Change will force the installation of expensive technologies to meet air pollution and water use limits. Coal generators are already lobbying the government to subvert these regulations.

The value destruction and fuel cost changes in India’s power sector highlights how quickly the tide has turned for coal power. Those investors who continue to believe the long transition timeframes often claimed by industry risk being exposed to unviable fossil assets. India’s coal power investors are quickly becoming another case in point.

Matt Gray – Analyst (Power & Utilities)

[1] The lowest bid received in 2017 was $38/MWh, compared to $41/MWh in 2018.

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