A UN carbon credit scheme's rejection of a huge coal power plant by Tata Power deprives the project of revenue running into hundreds of millions of euros and rings alarm bells for investors developing similar plants.
The incident spotlights a controversial UN process that allows valuable carbon offsets to be given to highly efficient coal power stations, a step green groups say erodes the spirit of trying to wean developing nations off polluting fossil fuels.
In Gujarat, Tata Power has completed more than half of its $4.2-billion 4,000-MW plant that will use more efficient supercritical boiler technology to cut carbon emissions and reduce coal consumption.
With its project backed by nearly $1 billion in debt financing by the World Bank's IFC finance arm and the Asian Development Bank, Tata had been hoping to earn carbon credits under a U.N. scheme that rewards investments in cleaner energy.
But late in July, the panel for the U.N.'s Clean Development Mechanism rejected Tata's application, saying it had not shown CDM revenues were critical to the project's return on equity.
The CDM lets investors in clean-energy projects in developing countries earn offsets called certified emissions reductions (CERs), currently priced at about 12 euros each , that they can sell for profit.
BLOW FOR DEVELOPERS
The step could be a blow for other developers looking to capitalise on India's massive infrastructure gap, such as Reliance, CLP Power India, Indiabulls Power and GMR Energy.
Data from Thomson Reuters' Point Carbon shows these companies' investments are among the more than 20 supercritical coal-fired projects formally applying for CDM carbon revenues, mostly in India and China. These plants are 10 percent more costly than more polluting sub-critical types.
"Developers planning power projects are not comfortable with supercritical technology," said Ashutosh Pandey, chief executive of the carbon advisory business for carbon project developer and advisory firm Emergent Ventures India.
"CDM revenue plays a very important role in making these projects viable," he added, saying CDM revenue offset deterrents such as high capital costs, long lead times and erratic fuel supply.
Design documents show Tata's project is expected to emit 215 million tonnes of CO2-equivalent between 2011 and 2020, or about a sixth of Japan's total annual greenhouse gas emissions.
It is one of nine planned investments in supercritical coal-fired plants supported by the government under its Ultra Mega Power Plant (UMPP) scheme to help firms secure land and environmental clearances.
Each plant is expected to generate about 4,000 MW, and cost about $4 billion, with the aim of meeting India's fast-growing appetite for electricity.
The country expects to add 61,000 MW of power generation capacity, mostly from coal-fired plants, in the five years to March 2012, or a fifth short of an earlier target of 78,000 MW.
"We view the (CDM Executive Board's) decision as a significant setback for the project and in fact for the overall UMPP program in India," said Takeo Koike, senior investment specialist for the Asian Development Bank.
"ADB did consider the CDM revenues as one of the project's important revenue streams, which is expected to improve the project's overall cash flow," he said, adding the bank would still support Tata's project.
Tata did not reply to detailed questions from Reuters, but said it was disappointed by the verdict. "We are studying the rationale for the decision and are in consultations to decide a further course of action," it said in a statement.
Equity analysts told Reuters the loss of carbon revenues, while material for the plant's earnings, would not have a significant impact on the company.
Project design documents submitted to the U.N. show Tata hoped to receive 26.5 million CERs by 2020, valued at 318 million euros ($419 million) according to today's prices.
"The carbon crediting probably was not factored in at the time of the bid," said one analyst, adding that estimates would not have considered such credits ahead of U.N. project approval.
Although such revenue could be material to investment returns, another analyst said, his model did not take any into consideration. "We've always seen that as quite blue sky."
Underscoring green groups' concerns over the need for carbon funding, a third analyst said, "These projects have to go ahead anyway -- whether the carbon revenues are there or not."
The analysts asked not to be identified as their employers bar them from discussing individual projects.
Ernst & Young, in a March report for Thomson Reuters' unit Project Finance International, pointed to the importance of carbon revenue to Indian supercritical plants.
"If registered as CDM projects, at current pricing, the carbon revenue could go up to 0.15 rupees per unit (kWh) of electricity generation, which obviously is encouraging to project developers," the firm said.
TWIST IN THE TATA TALE
Underscoring this, Reliance Power, which is developing three 4,000 MW supercritical coal-fired plants under the UMPP scheme, has sought CDM approval with an emission-cutting method using efficient power generation.
Taken together, its three plants would generate more power than all of Singapore. One of Reliance's plants hopes to earn more than 37 million CERs by 2020, U.N. data show.
In an ironic twist for Tata, rival Adani Power is building an even larger 4,620 MW plant right next door, part of which won CDM approval in December as the world's first supercritical coal-fired plant, set to get more than 18 million CERs by 2021.
Some analysts say the Tata rejection could end CDM approval for supercritical coal plants, but the U.N. disagreed.
"Project activities that fail the additionality criterion are not registered by the Board," a U.N. spokeswoman said, referring to the need to link project viability to CER sales.
"However, it is important to underline that projects are considered on a case-by-case basis."