Rising Economic, Environmental, and Human Costs of Coal Raise Questions for India’s Energy Future

Earlier this week, a Committee of Secretaries(CoS) established by Indian Prime Minister Manmohan Singh met to discuss environmental and economic issues facing the country’s electricity generation sector. CoS members included the Principal Secretary to the Prime Minister, as well as representatives from the Ministries of Power, Petroleum, Coal, Environment, and Finance.

The 4,000 MW Tata Power Ultra Mega Coal Power Project at Mundra, photo credit: Flickr - Joe Athialy

The 4,000 MW Tata Power Ultra Mega Coal Power Project at Mundra, photo credit: Flickr – Joe Athialy

The first day’s discussion focused on increasing difficulties of coal power production, including domestic production shortages and import costs. While the availability of domestic and supposedly cheap coal supplies was once cited as a central justification for pursuing coal power in India, which currently supplies about 70 percent of the country’s electricity generation, recent coal shortages, dramatic price increases, and environmental mismanagement by the coal industry have led policymakers, energy developers, and investors to acknowledge the need for the country to pursue an alternative energy path.

In January, an Indian Power Ministry official expressed concerns regarding the pricing scheme of the state-owned coal mining company, Coal India, which would increase the cost of coal power generation by an estimated 35 percent. Coal India is responsible for over 80 percent of the country’s coal production. A Coal India executive cited the need to rework the company’s pricing scheme, as coal prices have recently risen by 50 to 180 percent, depending on fuel quality.

The Independent Power Producers Association of India (IPPAI), which provides more than 95 percent of the country’s private electricity capacity, warned that around 50 coal power plant projects with a total capacity of over 68 gigawatts (GW) are at risk of default due to coal shortages and the siting of Indian coal mines on land protected by the Ministry of Environment and Forests (MoEF). This is a huge amount of vulnerable capacity, accounting for a large majority of the expected 80 GW of new capacity during India’s 12th Five-Year Plan (2007-2012).

These power sector defaults could total over US$27 billion, as coal power plants struggle to make ends meet with high fuel costs, agreements to sell electricity at low prices, and obstacles to land acquisition. The current unprofitability of coal power production in India is further exemplified by the fact that half of the existing loans sanctioned to power plants are going unused, and there are almost no new coal power project loans in the works.

High coal costs have led many coal and power companies to engage in questionable business practices, in potential violation of agreements with government and private clients. In 2009 Adani Power, an Indian power company, attempted to cancel its 25-year power purchase agreement (PPA) with the Gujarat state utility because it would no longer be able to supply power at the agreed upon rate due to high coal prices. The Appellate Tribunal for Electricity recently ruled that Adani Power was not within its rights to cancel the PPA, leaving questions as to how the company will be able to fulfill its obligations.

Similarly, the 4,000 megawatt (MW) Tata coal power plant in Mundra, Gujarat, may face financial difficulties due to rising international coal prices. The Mundra plant is supplied with fuel from Indonesian coal mines, which will begin being sold at global market rates in September of this year – meaning that the power plant will soon face higher fuel costs. The government of Gujarat, meanwhile, has disallowed any increase in electricity tariffs from the Tata Mundra plant, so the company will not be able to recover its high fuel costs by setting higher electricity prices.

Adding to concerns about proper operation of the coal industry, India’s Comptroller and Auditor General found that Coal India is operating 239 coal mines without environmental clearances, in direct violation of MoEF rules. Coal India also expanded the capacity of an additional ten coal mines without clearances. Despite these violations, the company is continuing operations at these mines while attempting to reach an agreement with the Environment Ministry.

Most disturbing of all are the violence and humans rights abuses against villagers protesting the land grabs and ecological damages of coal mines and power plants in their communities. In July 2010, citizens of 35 villages in Sompeta, Andhra Pradesh protested against a 2,640 MW coal power plant that would encroach on protected wetlands and threaten water resources of the fertile region. Police violently suppressed the protest, killing two villagers and injuring dozens more.

In March 2011, police destroyed 50 homes and attacked villagers with teargas shells and gunfire in response to local resistance to the construction of a coal power plant by East Coast Energy. Two villagers were killed and 25 were injured in the violent clash.

The economic, environmental, and human rights costs of coal power in India are forcing government agencies and private companies to seriously consider alternative energy sources. In contrast to the stagnating interest and falling profitability of coal power production, India’s renewable energy sector is growing rapidly. Clean energy investments in India grew by 52 percent in 2011 to reach US$10.3 billion that year. Wind made up the largest amount of this investment, at US$4.6 billion that year, but solar investments accounted for nearly all of the investment boom, exploding from US$0.6 billion in 2010 to US$4.2 billion in 2011.

The success of renewable energy in India is due to a combination of economic and political factors. High coal energy costs have made renewable energy an increasingly attractive investment in India, while government targets and incentives, such as the National Solar Mission, have further strengthened the clean energy investment climate.

As coal power generation becomes increasingly unviable in India, government and investors will turn more to renewable energy sources. It is thus important for policymakers and investors to continue to strengthen the policy and financial framework to enable a smooth and rapid transition to a sustainable energy future for India, while respecting the rights and interests of local communities affected by energy infrastructure projects.

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