One of the world’s most moribund businesses is rising from the dead.
India’s private-sector coal generators largely quit building new power plants seven years ago, fleeing massive losses and the looming threat of cheaper renewable power. That appears to be changing. Companies including Adani Power Ltd, JSW Group Ltd and Essar Power Ltd are looking to invest in new and existing plants, Reuters reported this week, suggesting the capital strike is ending. That's an object lesson in the power of state intervention to skew markets away from cheap, clean power toward costly, fossil-fired incumbent businesses.
Not many would have predicted such an outcome a few years back.
Slumping costs for solar and rising deployment of panels caused India’s coal power generation to peak between 2025 and 2027, with widespread impacts stretching from the mining and utilities industries to the country’s railways, shipping and engineering businesses, consultants KPMG wrote in a July 2017 study.
Those cost declines have been even more dramatic than analysts were predicting back then — but deployments haven’t kept pace. As a result, a return to coal looks increasingly likely. Far from peaking, as KPMG (and this columnist) forecast, the government now expects coal demand to increase by about 50 percent between now and 2030, when it’s set to hit 1.5 billion metric tons. If renewables don’t get built, that may be the only way to avoid blackouts and meet India’s inexorably rising demand for power.
What sparked the current revival?
It’s not about the economics. Coal’s competitive position compared to rival generation technologies has deteriorated over the period. In 2017, a new solar or wind generator was still marginally more costly than a new coal plant. Nowadays, it’s drastically cheaper. The average Indian solar generator in 2024 needs about $30.76 per megawatt hour to break even and wind is at $39.91/MWh, according to BloombergNEF, compared to $50.53/MWh for new coal and an average tariff at NTPC, the largest coal generator, of about $59/MWh in the 2023 fiscal year.
The renewables boom promised by those low prices, however, has failed to materialize, thanks to a welter of logistical and regulatory roadblocks. Prime Minister Narendra Modi promised in 2015 that wind and solar capacity would hit 175 gigawatts by 2022, but the eventual number came in about 40 percent lower. A goal of 500GW by 2030 looks further out of reach by the day: India needs to install about 50GW a year to hit that benchmark, but it’s struggling to reach a third of that level.
Far from easing the path for renewables, India’s government has spent recent years throwing up hurdles. Tariffs on imported solar panels have failed to incubate a viable domestic manufacturing sector, but have succeeded in raising costs for developers. Power auctions routinely demand battery or hydro backup for renewable projects that’s not necessary at the relatively low levels of grid penetration seen currently in India, adding further costs. That’s possibly due to the rickety nature of the electricity network, a deterrent in its own right.
On top of that, long-term contracts require state-owned electricity retailers, known as discoms, to keep paying coal generators for set volumes at prices far above what’s available in the market, making it pointless to procure cheaper renewables given fixed costs must be paid regardless. Discoms have been far more willing to cancel contracts with wind and solar developers. The industry has even been stymied by the Great Indian Bustard, a critically endangered bird whose habitat overlaps some of the country’s best wind and solar territory in Gujarat and Rajasthan.
Fossil fuels have enjoyed more lenient treatment. “Stressed assets” — coal generators that were unable to pay their debts to lenders — became a $23 billion drag on the financial sector, but the list of plants has been whittled from 34 in 2018 to four after alternative utilities, led by state-owned NTPC Ltd., stepped in as buyers of last resort and creditors took haircuts on their investments. The discoms have shouldered much of the financial burden by keeping retail power tariffs below profitable levels, with their own debts rising to 6.2 trillion rupees ($75 billion) in the 2022 fiscal year.
You might once have expected that renewables would gain market share at a speed commensurate with their rock-bottom prices. But governments have a remarkable ability to achieve their desired outcomes, even if the result is higher costs for electricity users. Right now, the private generators rushing back into coal are betting that Modi’s 500GW clean power target will prove as illusory as the 175GW one for 2022.
By entangling clean power in red tape while using state-owned bad banks and eye-watering power tariff rises to bail out insolvent fossil power, New Delhi has skewed the playing field toward the more costly, dirty technology. If the prospects for coal plants have been revitalized, it’s a sign that — like the Great Indian Bustard — they’ve become a protected species.
David Fickling is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
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