Tim Buckley, Director Energy Finance Studies May 2020

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Who Would Still Fund a New Coal Power Plant in India? Stranded Asset Risks Continue to Rise as Solar Deflation Continues

Executive Summary Renewableenergydeliveredmorethantwothirdsor9.39gigawatts(GW)ofIndia’snewgeneratingcapacityadditionsinthefiscalyear2019/20.

Incontrast,newthermalpowerplantsdelivered4.3GWduring2019/20,netanother2.5GWremovedduetoend-of-lifeplantclosures.Whileupfromthedecadelowofjust3.5GWinstalledin2018/19,thisstillmarksanear80%reductionintherateofthermalpowerinstallsdeliveredinthefouryearsto2015/16,whichatthattimewas20GWannually.

TheGovernmentofIndia’sNationalElectricityPlanof2018(NEP2018)calledforanadditional70GWormoreofnewcoal-firedpowerplantsby2026/27,andtheclosureofanother39GW.1

TheNEP2018wastransformationalinitsthinkingatthetime.However,thereisnowagrowingdisconnectbetweenthePlanfornewthermalpowerandsubdueddemandgrowth,thesignificantcostdisparityandneedforflexiblepeakingcapacity,versustherealityofdiminishingnewcoalplantadditionsoverthelastfiveyears.

Thisbegsthequestion:whoisstillwillingtofinancetheUS$70bnofnewinvestmentimplied,particularlyasnewbuildsmustatleasthavebasicpollutioncontrolsinstalled?

Morethanhalfofthenewcoal-firedpowerplantcapacityadditionsin2019/20wereequityfinancedbyenergyconglomerateNTPC,whilethemajorityofdebtfinancingforrecentlyproposedIndiancoalplantshasbeensourcedfromthenon-bankingfinancialinstitutionPowerFinanceCorporation(PFC)whichprimarilyfundspowerprojectsinIndia.Isthisacaseofdoingone’scivicdutydespitetheeconomiccostsinvolved?

1TheNEP2018calledfor93GWofnewcoaltobeaddedby2026/27and46GWofend-of-lifecoalplantclosures.Threeyearsintotheplan,21GWofnewcoalplantshavebeenaddedand7GWhavebeenclosed.

PAKISTAN

CHINA

BHUTAN

BANGLADESH

NEPAL

Bay of Bengal

ArabianSea

BengaluruChennai

HyderabadMumbai

Ahmedabad Kolkata

New Delhi

SRI LANKA

MYANMAR

INDIA

Who Would Still Fund a New Coal Power Plant in India?

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WhilebothNTPCandPFCarecontrolledbythegovernmentofIndia,theyarealsostockexchangelistedentities.Liketheirinternationalpeers,theirongoingsharepriceunderperformancesuggestsastrategicchangeindirectionisneeded.

Continuingtoinvestininflexiblecoalpowerequatestoaninvestmentincurrentorsoon-to-bestrandedassets,whichisprovingtobeawealthdestructiveexercise.

ThepandemicandnationallockdownhasonceagainhighlightedIndia’sentirelyunrealisticmodellingassumptionsofcoal-firedpowerplantswhichassumesrunningat70-80%capacityutilisationrates,doubletheactualratesseeninApril2020.

Instarkcontrast,Indianandinternationalcapitalisfocussedonnew,moresustainableandcheaperdomesticpoweropportunities.TheUS$2bn,2GWsolartenderawardedearlierthismonthataUS$recordlowofUS$33permegawatthour(MWh,orRs2.55/kWh)providesclearevidenceofthis.

ThemovelastweekbyglobalprivateequitygiantKKRtoinvestinrenewableinfrastructureprojectsprovidesasecondconfirmationofglobalcapital’sgrowinginterestinIndia.

Inthisnote,weexplorethesetrendsinmoredetail.

State of India’s Electricity Grid 2019/20 India’stotalinstalledcapacityduring2019/20rose4%nationallyto370.1GW(seeFigure1).

Figure 1: India's Installed Electricity Capacity Additions in 2019/20 (GW)

Source: CEA, MNRE, IEEFA calculations

Withinthat,Indiainstalled9.39GWofnewon-gridrenewableenergycapacity,plussome2GWofbehind-the-meterrooftopsolarand0.3GWoflargehydropower.Bycomparison,Indiainstalled4.32GWofnetnewthermalpowercapacity.Insum,morethantwo-thirdsoftotalnewpowercapacityinstallswererenewableenergy.

Fuel Source Mar 2019 March 2020 Change (GW)

Renewables 77.6 87.0 9.39Large Hydro 45.4 45.7 0.30Nuclear 6.8 6.8 0.00Thermal 226.3 230.6 4.32Total Ongrid Capacity 356.1 370.1 14.01

Continuing to invest in inflexible coal power

equates to an investment in current or soon-to-be

stranded assets.

Who Would Still Fund a New Coal Power Plant in India?

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Whilerenewableenergyinstallsarewell-downrelativetotheGovernment’sambitioustargetof36GWannuallythroughto2030,requiredtoreachthe450GWtotal,thefactthatrenewableenergyinstallsnearlydoubledthetraditionalthermalpowercapacityinstallsisanindicationofthenewdirectionIndia’spowersectorismovingtowards.

NTPCcommissioned3.44GWofnewthermalpowercapacityin2019/20,halfofall(gross)additionsacrossIndia.StategovernmentpowerutilitiesinGujarat,Orissa,RajasthanandTamilNaduaccountedforthebalance.

TowardstheendofthefinancialyearinMarch2020,Unit-7(660MW)oftheSuratgarhSuperThermalPowerStation(STPS)wascommissionedbyRajasthanRajyaVidyutUtpadanNigamLtd,theelectricitygenerationcompanyofthegovernmentofRajasthan.Unit-2(660MW)oftheKhargoneSuperThermalPowerStationinMadhyaPradeshwasalsocommissionedbyNTPC.

Atthesametimehowever,910MWofthermalpowercapacityacrossnineend-of-life,subscalecoal-firedpowerunitsinfourplantsinTamilNadu,HaryanaandJharkhandclosedduringthemonthofMarch2020.

Inall,totalthermalpowerclosuresover2019/20were2.48GW.ThisisthehighestrateofthermalpowerclosurethatIndiahaseverseen,to-dateatleast.

2019/20: The Year in Review Renewableenergyreached87GWofcapacityor23.5%oftotalpowercapacityinthefiscalyear2019/20,andprovided10.2%oftotalpowergeneration(or21.6%whenincludinghydro-electricity).

Figure 2: India's Electricity Capacity and Generation (2019/20)

Source: CEA, IEEFA Estimates

Capacity IncreaseGW % TWh % Utilisation GW yoy

Coal-fired 205.2 55.4% 986.9 71.3% 55.5% 4.4Gas-fired 24.9 6.7% 49.0 3.5% 22.4% 0.0Diesel-fired 0.5 0.1% 0.1 0.0% 2.0% -0.1Large Hydro 45.7 12.3% 157.9 11.4% 39.6% 0.3Nuclear 6.8 1.8% 42.8 3.1% 72.1% 0.0Renewables 87.0 23.5% 141.7 10.2% 19.7% 9.4Bhutan (Import) n.a n.a 4.9 0.4% n.a.Total 370.1 100% 1,383.3 100.0% 14.0Captive power 51.4Total 421.5

---- Capacity ---- -- Generation --

This is the highest rate of thermal power

closure that India has ever seen, to-date at

least.

Who Would Still Fund a New Coal Power Plant in India?

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Coal-firedpowergenerationremainedthedominantsourceofelectricityinIndiaduring2019/20.Itprovided71.3%oftotalgeneration(downfrom75.1%twoyearsago)inamarketwheretotalpowergenerationgrewbyjust0.3%year-on-year,wellbelowthe6%averagegrowthrateseeninthepastdecade.

The National Lockdown Has Seen Total Electricity Demand Drop 24% year on year in April 2020 TheCOVID-19pandemicandnationallockdownisprovingextremelyproblematicforcoal-firedpowergeneration,bothforexistingplantsandthosethatareproposedbutyettogetfinancing.

Inthefirst33daysofthe2020/21fiscalyear,coal-firedpowergenerationwasdownalmost30,000gigawatthours(GWh)(seeFigure3).Thismeansthatcoal-firedpowergenerationhasworn100%ofthepowerdemandloss,comparedtoits71%shareoftotalgeneration.

Figure 3: India's Electricity Generation by Fuel Type (April 2020)

Source: POSOCO Daily Reports, Charles Worringham for Indiapowerreview.com

Coal-fired power generation has worn

more than 100% of the power demand loss.

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Thisisaveryclearlessonintheimplicationsofthemeritordereffect(inIndia,thisisphrasedasrenewableshaving“mustrun”status),wherethelowmarginalcostsourcesofsupplygetpriority(oncebuilt,renewableshaveanearzeromarginalcostofgeneration),andthehighmarginalcostproducerlosesout(inthiscase,coal).

Whereasadecadeagocoal-firedpowerplantsweremodelledasrunningatonaverage70-80%capacityinayear,during2019/20theaveragecoal-firedpowerplantranjust55.5%ofthetime(Figure2).Infact,duringthemonthofApril2020theaverageIndiancoal-firedpowerplantoperatedatjust40%capacityutilisation.2Coal-firedpowerplantsunabletooperateattheexpectedutilisationrateareoperationallylessefficientandalsohavetoamortisetheirfixedcostsoveralowerlevelofproduction,givingahigherthanaveragecostofproduction.

Financiersandpromotersofcoal-firedpowerplantsclearlyhavetofactorthisinasanotherkeyfinancialriskgivingrisetostrandedassetsinthethermalpowersector.

Even During a Lockdown, Global Capital Will Still Finance Deflationary Solar Incontrasttothe,atbest,dourthermalpowerelectricitymarkettrends,alandmark2GWsolartenderwasawardedbyNHPCofIndiainApril2020.

PricedatanearrecordlowofRs2.55/kWhfixedflatfor25years,itequatestoanIndianrecordlowofUS$33/MWh(atthecurrentRp76perUS$).InadditiontoraisingUS$2bnofnewinfrastructureinvestmentatthestartoftheworsepandemicinmodernhistory,thefundingprofileofthewinningparties–SBEnergy,O2Power,EdenRenewables,AxisEnergyandAvaada–isalsotelling:

• SBEnergywon600MWofthetender,bringingglobalcapitaltoIndiaviaitsparentcompany,SoftBankofJapan;

• NewentrantO2Power,astartupwithUS$500mofequitybackingfromtheleadingprivateequityfirmEQTInfrastructureofSwedenandtheTemaseksovereignwealthfundofSingapore,won380MW;

• EdenRenewables,backedbyEDFandTotalofFrance,won300MW;

• India’sAxisEnergy,whichhasdevelopedrenewableenergyprojectsithassubsequentlyon-soldtothegiantinfrastructureinvestorBrookfieldAssetManagementofCanada,won400MW;and

• India’sAvaadaEnergywon380MW,showinghowspecialistIndianrenewableoperatorscontinuetocommitsignificantnewcapitaltothisemergingsector.AvaadawasfoundedbyVineetandSindoorMittalwhohadpreviouslyfoundedWelspunEnergybeforesellingit’s1.1GWrenewablesportfoliotoTataPower,India’slargestintegratedprivatepowercompany.

2IEEFAnotescapacityutilisationislowerthantheplantloadfactor(PLF)regularlycitedinIndia(thePLFignoresdowntimerelatedtocoalsupplydisruption).

Who Would Still Fund a New Coal Power Plant in India?

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TherangeofplayersinthesolarbidclearlyshowsthatwhileIndia’srenewableenergytargetsareexceptionallyambitious,whenbackedbytherightlegalandpolicyframeworks,capitalfrombothglobalandIndiandomesticleadersisavailableatanexceptionallycompetitiveprice.

Incontrast,anewnon-minemouthorimportcoal-firedpowerplantinIndiawouldrequireastartingtariffofRs4-5/kWh(risingovertimewithinflation).

InApril2020,globalprivateequityleaderKKRalsoenteredtheIndianrenewableinfrastructuresector,acquiring317MWofsolarfromShapoorjiPallonjiSolarHoldings.ThisbuildsonitsUS$400minvestmentlastyeartotakecontrolofIndiaGridTrust,theinfrastructureinvestmenttrustofSterlitePowerTransmission,andalsoitsinvestmentofUS$510mtoacquirea60%stakeinRamkyEnviroEngineersLimited,anenvironmentalwastemanagementbusiness.IEEFAhasalsobeenwatchingforBlackStone’sfirstmoveintoIndianrenewables.

Thequestionremains:Whywouldanydebtorequitycapitalprovidersfundahighemission,highlypollutingnewcoal-firedpowerplantatdoublethecostofdeflationaryrenewables?

The Buyer and Funder of Last Resort? ForallthecompetitiveadvantagesofhavingthesovereignbackingoftheGovernmentofIndia,andtheeconomiesofscaleofrunninga54GWpowergenerationportfolioacrossIndia,andanexcellentoperatingperformancethatseesitscoal-firedpowerplantsrunat10-20%highercapacityutilisationratesthanthenationalaverage,NTPChasthecompetitivedisadvantageofhavingtoprovidethenationalserviceofsupplyingtheexpectedpowergrowthneedsofIndia.

Whereprivatefirmshavestoppedinvestinggoodmoneyafterbad,NTPChascontinuedtobuildsome3GWannuallyofnewcoal-firedpowerplants,evenasitembracesthenewtechnologyopportunitiesoflowcost,sustainablerenewableenergyinadditiontoopportunitiesinelectrification(intermsoffastchargersandhydrogenbuses).

NTPC’scontinuedinvestmentincoalcomesatasignificantcosttoinvestors,withshares(red)down25%overthelastfiveyears,againstariseof18%acrosstheIndianequitymarket(blue)inthesametimeframe(seeFigure4).

Capital from both global and Indian domestic

leaders is available at an exceptionally competitive

price.

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Figure 4: India's Electricity Generation by Fuel Type (April 2020)

Source: Yahoo Finance Likewise,whereasforeigninvestorsandmostIndianprivatebankshavelearnttheirlessonfromrepeatedlyinvestinginstrandedassetsinthethermalpowersector,thegovernmentcontrolledPowerFinanceCorporation(PFC)continuestocommittothefinancingofexpensivenewcoal-firedpowerplantswherenootherswill.PFChasbeennamedasthesoleUS$1.5bnfinancierofAdani’simportcoal-firedpowerplantatGodda,andforTHDCIndia’sligation-pronecoalproposalatKhurja.PFCshares(black)aredown32%inthelastfiveyears.

Giventheverylowcostofdomesticrenewableenergyinfrastructure,ratherthanbuildingyetmoreinflexible,highcost,highemissioncoal-firedpowerplants,itislogicalforNTPCinsteadtobelobbyingforatime-of-dayorpeakingpowerpricesignalsufficienttounderwriteinvestmentsintechnologiesthatcomplementtheintermittencyofrenewableenergy.

Withdecadelowpricesforgas(albeitthesepricescannotbelockedin),investinginpeakinggascapacitymightbeonepathforward.WenotehoweverthattheU.S.utilityleaderNextEraEnergyhasjustshelvedplansfortwogaspoweredplantsithadslatedfora2025commissioningduetothelikelihoodofthembeingtechnologicallychallengedbylowcostrenewablesfirmedbybatterystorage.

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Conclusion OnceIndiahasmasteredthecoronaviruspandemic,itwillbetimetolooktoagreeninvestment-ledstimulustokickstarttheIndianeconomy.IEEFAwouldnotetherightpoliciesandstructuresarelargelyalreadyinplace,andprivatecapitalisentirelyreadytoinvest.

Theannouncementofyetanotherrecordlow1.5GWsolartenderinAbuDhabiinApril2020atabrilliantlylowUS$13.50/MWh(15%belowthepriceofthewinningtenderseenonlyinJanuary2020)isareminderoftheongoingdeflationarynatureofrenewableenergyinfrastructure.

ThecallisfortheGovernmentofIndiatoleadthewayonaninnovativeandsustainableeconomicrecoverythatbuildsIndia’sresilienceandenergysecurity,whilstalsointroducingenergypricedeflationthatcankickstartIndia’sinternationalcompetitivenessofkeyexportindustriestobestleveragetheexchangerateweakness.

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About IEEFA TheInstituteforEnergyEconomicsandFinancialAnalysisconductsresearchandanalysesonfinancialandeconomicissuesrelatedtoenergyandtheenvironment.TheInstitute’smissionistoacceleratethetransitiontoadiverse,sustainableandprofitableenergyeconomy.www.ieefa.org

About the Author Tim Buckley TimBuckley,IEEFA’sdirectorofenergyfinanceresearch,Australasia,hasover30yearsoffinancialmarketexperiencecoveringtheAustralian,Asianandglobalequitymarketsfrombothabuyandsellsideperspective.Timwasatop-ratedEquityResearchAnalystandhascoveredmostsectorsoftheAustralianeconomy.TimwasaManagingDirector,HeadofEquityResearchatCitigroupfor17years,aswellasco-ManagingDirectorofArkxInvestmentManagementP/L,agloballistedcleanenergyinvestmentfirmthatwasjointlyownedbymanagementandWestpacBankingGroup.