India Starts Down a Bold Path to a New Energy Economy

By Tim Buckley

In the same week that China and the U.S. launch a historic agreement to address climate change and work on a faster transition of their economies toward a low-carbon future, Indian Prime Minister Narendra Modi’s new government has also upped the ante considerably.

In a landmark announcement that has caught the global coal industry by surprise, Energy Minister Piyush Goyal has announced an ambitious target that could see India cease thermal coal imports within two to three years.

Far from being the savior of the world’s seaborne thermal coal industry, India could follow China, America, Japan and the European Union by putting in place a series of strategies that limit its reliance on imported fossil fuels.

China, the U.S., and India collectively accounted for 4,250 million tons — or 76 percent of the world’s consumption of thermal coal in 2013. Peak domestic thermal coal consumption in the U.S. occurred in 2007, and has declined 20 percent since then. China increased its coal consumption by 10 percent annually in the decade up to 2011, but the last three years have seen a rapid deceleration in demand growth, culminating in coal consumption demand down by 1 per cent year to date in 2014, with imports taking the brunt of the decline.

India has been one of the last bastions of strong global growth for thermal coal, with demand doubling in the last decade and electricity demand growing at 6 percent annually over the past decade.

Even with its population of 1.3 billion people, efforts to protect the environment and modernize the Indian economy, domestic Indian coal production has been growing well below target at only 2 percent annually for the last five years.

Meanwhile, it has shown a marked reliance on imported coal, which has grown from 10 percent of market share five years ago to well over 20 percent in 2013-14. Almost all of these coal imports have been sourced from Indonesia and South Africa, the two closest coal-exporting nations to India.

Compelling Logic and Clear Motives

This is what makes the announcement to target a cessation of thermal-coal imports into India within two to three years surprising. It will be a huge challenge for the Modi government and India’s electricity industry to meet this goal, but the logic is compelling and the motivation is clear.

While Goyal has acknowledged the pressing challenge of climate change, he is also driven to address India’s air-pollution problem, energy security risks from an electricity system lacking diversity of supply due to its reliant on coal, and the critical need to address energy poverty endured by the more than 300 million people living beyond the reach of the Indian electricity grid.

Central to this ambition is the development of a significant uplift in the amount of electricity delivered to consumers. Goyal has outlined a plan to attract $US250 billion of new capital investment to the Indian electricity sector over the next four to five years.

For this to occur, foreign investors need more to gain more confidence in the economic and regulatory system in India. It also requires a stabilization of the currency, so foreign investors can invest without a massive erosion of their capital value through an ongoing devaluation of the Rupee. Goyal recognizes that increasing India’s electricity supply through expensive imported coal will undermine that goal through the combined impact of raising the current account deficit and building domestic inflation (the price of imported coal is two to three times higher than domestically produced coal).

Economic and Social Forces Support India’s Power Makeover

Goyal’s vision is aggressive and ambitious. But it is also well thought through, and it is economically and socially necessary.

A key target is the delivery of electricity to the 52 million households who live beyond the grid. Distributed electricity generation and the rollout of micro grids will be the near-term solution, and it will involve small distributed solar systems with battery storage and LED lighting.

Separately, the government wants to address the massive 25 to 30 percent grid transmission and distribution losses. Rather than continuing to produce ever more coal-fired power only to lose a quarter of it before it reaches customers, Goyal is stressing a combination of boosting transmission efficiency and resolving the financially distressed state of many state electricity distribution companies so they can actually afford to pay for electricity deliveries received.

Only through a dramatic improvement in this payments process can electricity generators then gain the confidence of financial institutions in the bankability of their power-purchase agreements.

Another priority is to attract $US100 billion of new investment over the next four to five years to solar and wind power generation. The goal is to add is 10 gigawatts of solar annually, and six to eight gigawatts of new wind farms. The regulatory and policy framework for such an expansion is largely in place, given that solar systems can be installed in a matter months rather than the the many years required for the planning and construction of thermal, hydro and nuclear power plants.

Goyal sees 100 gigawatts of cumulative solar installations across India by 2022, a 500 percent increase over the previous government target.

Bringing More Capital to Solar and Wind

He has also detailed the intention to leverage the financial power of a new initiative reinstated in the 2014-15 budget in May for an  80 percent accelerated depreciation allowance for renewable energy investments. The government is actively lobbying the top 250 tax-paying entities across India to take advantage of the progrm. This brings an entirely new capital base to bear on the renewable energy sector.

Goyal cites the National Thermal Power Corporation and Coal India Limited as examples of companies that can use this strategy, and Coal India has subsequently announced it will invest $US1.2 billion in solar projects across India. Goyal also notes that the 250 top tax-paying entities generally have very strong credit ratings, which lets them leverage the financial markets at significantly lower rates than many of the incumbent electricity generators.

Goyal has also set a very ambitious target for Coal India to double its domestic coal output over the next five years, emphasizing an increased emphasis on mine-mouth coal-fired power plants and improved railway efficiencies. This plan would cost-effectively facilitate increased electricity supply without the electricity price inflation that would result from an increased reliance on imported coal.

This is an ambitious plan over all, but one that is well conceived. It marks a  clear change from India’s recent reliance on expensive, imported coal-fired power.

Tim Buckley is Director of Energy Finance Studies, Australasia for the Institute of Energy Economics and Financial Analysis (IEEFA).

This column is condensed from a version published earlier today on RenewEconomy.com