September 26, 2018 Read More →

India’s muddled coal policy leaves producers and banks poorer

Nikkei Asian Review:

After years of developing the thermal energy sector to meet the demands of a nation prone to outages, India is now facing a power glut with over 30 such producers teetering on bankruptcy. Yet the government shows no letup in its drive for more coal power and the effect of oversupply is rippling out to other sectors such as banks.

India’s embrace of coal has allowed it to triple power generation over the past 15 years to 344 gigawatts, surpassing Japan to become the world’s third largest electricity market.

“India has gone through a dramatic change,” said Sydney-based Tim Buckley, director at the Institute for Energy Economics and Financial Analysis. “[Until] five years ago, power outages were absolutely commonplace and there was a massive deficit in supply relative to demand.”

That supply needed to feed the country’s phenomenal economic growth, registering 8.2% in the quarter ended June, has outstripped demand.A government report showed that 34 power plants with a total capacity of 40 GW are on the verge of bankruptcy. A report by investment bank Credit Suisse pegs their outstanding debt at 1.75 trillion rupees ($25 billion) that could potentially deal a heavy blow to banks if they default.

Many of India’s power plants are either working below capacity or are yet to be built for various reasons, including a lack of committed coal source and delays in land acquisition due to fights with farmers and rural dwellers over poor compensation and rehabilitation packages. This in turn has discouraged electricity buyers from signing purchase agreements with these power companies.

The frenzied expansion of the power sector over the past few years is one of the reasons the country’s banks are saddled with some of the highest levels of bad debt among emerging markets. This has had the knock-on impact of preventing them from lending to healthier companies, and as a result, reined in their potential for growth.

Yet alongside the development of coal power, Prime Minister Narendra Modi has set an ambitious target for India to install 175 GW of renewable energy by 2022.

With wind and solar energy becoming cheaper than coal, some electricity buyers are understandably turning to those new sources, adding to the woes of coal producers and their lenders.

Indeed, the country’s power sector and government seem to be confused. State-run Coal India, for example, plans to diversify its business to include renewable sources of energy, including solar power. At the same time, India has about 50 GW of coal-fired plants in various stages of construction. All are expected to be completed by 2025.

Coal will continue to be India’s mainstay energy source for the medium term, the government panel that drew up the report on the 34 power projects said in that report.

“India doesn’t have a focused approach on its power policy,” said Ashish Nainan, a research analyst at CARE Ratings.

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