If we are ramping up coal production abroad at a time when the IPCC and UN say it should drop, we should know what we are getting into
Last Updated: Thursday 16 January 2020
This is the second in a two-part series. The first part can be read here.
Do India’s poor need coal from Adani’s Carmichael mine?
We ended the first part of this series by talking about the Ultra Mega Power Plants (UMPPs) that Adani and Tata Power set up in Mundra, Gujarat.
Sure, UMPPs do offer economies of scale and more efficient technology. Given that we are likely to continue consuming coal for a while, the need for higher-quality coal, including through imports, is real.
But locking up nearly half of Gujarat’s power capacity in plants which were this reliant on imports? And then simply allowing costs to be passed on to consumers? That kind of ‘flexibility’ does not do much for India’s poor.
The high-powered committee’s other recommendations are apparently aimed at ‘offsetting’ this additional burden on consumers. These recommendations largely involve the distribution companies in Gujarat having the option to purchase more power from the plants under dispute. This includes an option to extend the power purchase agreement for a period of ten years (beyond its current 25-year period).
The Central Electricity Regulatory Commission’s 2019 Tariff Regulations explicitly define the ‘useful life’ of thermal power plants as 25 years. They should be shut down at this point, but are often allowed to continue generating at the discretion of the regulator, often with some extra tariff compensation to make technological upgrades.
This is based on a selective economic logic — at 25 years, a plant’s capital costs are largely recovered, making it a ‘cheap’ source of generation, if one ignores the health, social, environmental and climate costs of coal.
The high-powered committee does not mandate that consumers should use more coal power, but its recommendation effectively extends the country’s lock-in to coal. It is certainly not an alleviation of the burden on consumers from the passing on of import costs.
If anything, it is a version of the sunk cost fallacy, where consumers are locked into a price point for coal power based on a dubious reading of their interest, and then encouraged to further lock themselves in to offset the burden of the initial lock-in.
The other interesting ‘offset’ is the recommendation that the purchaser of power (usually a state electricity distribution company) be allowed to collect a portion of the ‘profit’ from the companies’ mines in Indonesia. This is an ‘innovative’ solution which raises many red flags.
For one, giving a distribution company an interest in a generation/mining company’s profits distorts the distribution company’s incentive to procure electricity at the lowest possible cost for its consumers. This is partly why there is a push (by the Niti Aayog, among others) to separate “carriage and content” ie. separate the generation and distribution of electricity.
The merits of a ‘free market’ for electricity are debatable, but it is an odd time to recommend an even tighter entwining of interests between distributors and a few particular generators.
For another, keeping track of the accounting practices of a company operating mines in a completely different jurisdiction is the type of solution which requires a high degree of regulatory and administrative oversight. Adani is currently in litigation over its alleged over-invoicing of coal imports in order to avoid paying customs duties.
The offending actions occurred between 2011 and 2015, administrative action was initiated in 2016, which was countered with litigation initiated in 2018. Several obstacles still remain in investigating — let alone recovering — the alleged losses to the exchequer.
So again, not really an offset; rather, the Indian consumer is given an incentive to continue supporting coal extraction abroad. Both the ‘mining profits’ and the ‘power purchase extension’ recommendations are arguably a subsidy to coal miners and coal power generators. At the very least, they make it more difficult for the consumer to turn away from coal, increasing the cost of transition to cleaner energy sources.
These recommendations were accepted in a decision of the Central Electricity Regulatory Commission in April 2019. The Supreme Court may well follow suit. A political solution is now being stamped with the authority of the legal system. This is the context in which Indian consumers should view Adani’s operations in Australia.
In theory, we are pitting Indonesia and Australia — two major coal producers — against each other. In theory, the upside is a lower cost of import, the downside is a higher dependence on political decisions abroad, outside the control of the Indian consumer.
In reality, our domestic political economy means that the consumer (particularly the poor) will see little of the upside while bearing most of the downside.
With support from the Australian government, the Indian government, and multiple large corporate interests, Carmichael looks like a classic ‘too-big-to-fail’ creation. Indians bear comparatively limited responsibility for the climate crisis, but we still bear the responsibility to think for ourselves.
If we are ramping up coal production abroad at a time the Inter-governmental Panel on Climate Change and the United Nations indicate that it should be dropping sharply, we better be quite clear on what we are getting ourselves into.CoalAdaniCarmichael minesEnergyWorldSubscribe to Weekly Newsletter : Donate Now POST A COMMENTENERGY
Do India’s poor need coal from Adani’s Carmichael mine?
Not if it restricts the Indian consumer’s options to source affordable energyNEXT BLOG ❯
Last Updated: Tuesday 14 January 2020
With protests raging in Germany against Siemens AG’s decision to supply technological services to Adani Mining’s Carmichael coal mine in Australia, the Adani name is now infamous on at least three continents.
For most companies, the past near-decade of controversy around the Carmichael mine would constitute a crippling public relations disaster. Yet Adani forges on. Legitimate regulatory oversight and multiple unwilling banks (some of whom were previously its biggest backers) have prompted little reconsideration. The protest against Siemens looks likely to go the same way.
Even this pursuit of self-interest must veil itself in the garb of higher principle. Adani spokespersons have been busy in Australia admonishing ‘privileged’ opponents for denying millions of poor Indians their right to energy. The conglomerate is apparently working in our national interest, with the oft-vocal blessing of the Indian government.
This is a tricky issue for the grassroots mobilisation in Australia against the Carmichael mine. If it were true, their concerns over pollution, water use, climate and indigenous people’s rights can be dismissed as a form of not-in-my-backyardism. These are movements which are reasonably aware of global equity concerns, they know better than to deny the energy needs of the developing world.
So it is for us in India to try and honestly answer the question — how badly do our poor need Australian coal? On the face of it, this is a matter of projecting India’s energy demand out to the future (say the year 2040), projecting our domestic coal production out to the same year, and hence deriving a number for the amount of import required.
There are some excellent analyses of this type, which indicate that a combination of India’s domestic renewables targets, the slowdown in construction of coal-fired power plants and the government’s (especially Coal India Limited’s) push toward boosting domestic production means that the need for imports, particularly from Australia, is limited (see here & here).
There are also analyses indicating it is cheaper to supply communities lacking energy access through decentralised renewable energy, than importing coal to feed the grid.
Still, the coexistence of seemingly contradictory trends is not uncommon in energy policy. In India’s case, the sheer size of the population and low per capita energy consumption mean that the scope for demand growth in the coming decades is gargantuan.
It is possible that the quantum of imports increases, even as the share of imports (as a percentage of total consumption) declines. In that situation, is there harm in insuring our energy future by adding another source of supply?
A seductive argument
For decades, the ‘flexibility’ of having the option to import fossil fuels has been a seductive argument. Setting aside the multiple military misadventures resulting from this outlook, it bears examining whether importing coal has expanded India’s energy options or constricted them.
That story begins with the Ultra Mega Power Plants (UMPPs) that Adani and Tata Power set up in Mundra, Gujarat, which were supposed to be supplied by a mix of Indian and Indonesian coal. Indonesia changed its regulations on coal exports, which drove up the cost of import (and hence, the cost of generating power).
The conglomerates promptly approached the government to increase the price (aka tariff) they would receive for electricity generated, as a ‘compensatory tariff’ for the increased cost of generation.
The Supreme Court rejected that argument in 2017, because the Electricity Act only allows compensatory tariffs based on a change of law by the Union government (not based on changes in laws by foreign governments). The apex court also rejected the companies’ arguments that variations in the cost of imports are an un-anticipated ‘act of God’.
If the interest of poor energy consumers is paramount, the matter should have ended there, with these companies absorbing the hit to their margins. But the companies made their hurt feelings clear, offering to sell the power plants to the government for the TV-serial-inspired fee of Re 1.
Inevitably, the legal gave way to the political, with a high powered committee empowered to consider the question of what to do with these apparently unviable power plants. That panel came back with a series of recommendations based on the understanding that “Gujarat has a share of 4,805 MW from these three projects in question, which contribute around 45 per cent of its total energy requirement” and hence “on the touchstone of ‘consumer interest’, it can be safely concluded that these projects need to be salvaged.”
It recommended that the cost of import be passed on to the consumer, undermining the Supreme Court order a year earlier. The benefit to the companies involved is estimated at Rs 1.29 lakh crore; in Gujarat alone, consumers will bear an estimated additional burden of Rs 90,000 crore. Public banks will lose an estimated Rs 18,000 crore.