Cities are power guzzlers. The electricity that runs our cities comes majorly from coal. Can governments stop burning coal for power? New technologies and conventional wisdom have given governments worldwide alternatives to switch from coal to renewable sources for their energy requirements. The change on the ground is happening but gradually. Is it happening fast enough and in sync with the timelines of our international agendas on climate change? The governments will also have to find out a feasible solution to the stranded asset problem in coal. An analysis of the present situation.
Phasing out from coal will bring multiple benefits for everyone. It will reduce the annual emission from coal power plants and make the air in the cities cleaner and the environment safer. The time for coal is over as cleaner options abound. Despite understanding the consequences of using coal, it remains the dominant contributor to India’s energy mix. Over 60 per cent of electricity comes from coal-fired power plants. The issue is also serious because the government estimates suggest that India’s energy demand will double in the next decade. India has to intensify its efforts to accelerate the transitional shift for the fight against climate change to be successful.
António Guterres, the UN Secretary-General, recently said, “All planned coal projects around the world must be cancelled to end the “deadly addiction” to the most polluting fossil fuel. Phasing out coal from the electricity sector is the single most important step to tackle the climate crisis.” In India, many big cities, including Delhi, have shut down coal-powered plants within the city limits for making the urban environment healthy. Badarpur Thermal Power Station (BTPS), which was closed in 2018, had been the city’s biggest power generator with an installed capacity of 705 MW for over 45 years. The reports suggest that it was responsible for 11 per cent of the deadly ultrafine particulate matter (PM2.5) in the city’s air. It was the last one to be closed in the national capital Ministry of Environment, Forest and Climate Change (MoEF&CC) framed strict environmental norms for coal-based power plants under the Environment Protection Act, 1986. The deadline for the TPPs to comply with these norms was by December 2017. Later, it was extended to 2022. Many research reports by independent bodies suggest that many coal-fired power plants have not fully complied with the norms because of technology’s non-availability and economic reasons.
Energy transition
India is the second-largest coal-producing and consuming country globally and the third-largest emitter of greenhouse gases. India is at a crucial juncture and going through the most significant energy transition phase. Its transition from carbon-intensive resources is critical to global climate change efforts. In the United Nations Climate Ambition Summit, the Government of India has said that it will exceed its renewable energy targets. Prime Minister Narendra Modi reiterated, “Our renewable energy capacity is the fourth largest in the world. It will reach 175 gigawatts before 2022.” He has put numbers to his prediction on another platform, saying that the country will reach 220 gigawatts by 2022. India’s total installed capacity of renewable energy is 90 gigawatts. According to the Ministry of New and Renewable Energy, the government will add additional 49.59 gigawatts of renewable energy. An additional 27.41 gigawatts of capacity have been tendered—the total capacity of RE projects already commissioned or in the pipeline stands at nearly 167 gigawatts. India targets to achieve 175 GWs by 2022 and 450 GWs by 2030. With this speed, the 2022 target would be like a walk in the park. The cost-effectiveness of the electricity generated would also play an important role. The cost of solar energy is continuously coming down. Recently, a 500-megawatt solar auction held by utility Gujarat Urja Vikas Nigam Limited sets a record for the lowest price in India of Rs 1.99 kilowatt-hour in December 2020. The earlier lowest was Rs 2 in November 2020 and 2.36 per unit in June 2020. It is a good sign that renewable energy prices are coming down considerably, making it attractive for all stakeholders, especially the consumers. But solar alone cannot solve the increasing demand. It has to be supported by innovation in the country’s power sector. To meet the demand sustainably, it must invest in technology and innovations to generate energy from clean sources and maximize the output with economical cost.
India’s total installed capacity of renewable energy is 90 gigawatts. According to the Ministry of New and Renewable Energy, the government will add additional 49.59 gigawatts of renewable energy. An additional 27.41 gigawatts of capacity have been tendered—the total capacity of RE projects already commissioned or in the pipeline stands at nearly 167 gigawatts. India targets to achieve 175 GWs by 2022 and 450 GWs by 2030. With this speed, the 2022 target would be like a walk in the park
Financial implications
The International Energy Agency (IEA) has been saying time and again that the uncontrolled use of coal must cease globally by 2050 if warming is to be held below 2°Celsius. Every country will have to move away from coal, eventually to address the impending climate crisis. The major roadblock is the economic aspect of this decision. We know human life and the environment are priceless. Financial numbers cannot determine their value. Practically, it cannot be ignored altogether. All countries, financial institutions and cities have to figure out a feasible way out.
The countries and leaders will have to look at all aspects of the issue for effective handling. As per some estimates, the quantum of stranded assets globally could be as high as USD 900 billion. It raises questions about the financial consequences for corporates, banks and financial institutes that have resources locked in coal assets. If no solution is offered, then the vested interests of different parties will find ways to use coal. Financial markets do not like uncertainty. With rising concerns on climate change impacts, they need a clear and complete future outlook, a comprehensive view on risks and opportunities presented by climate-related policy, and emerging technologies in our changing world. Financial markets, most of the times, react on a long-term basis after assessing all the factors. Despite having access to various reports on climate change and its impacts, the financial markets’ actors are not sure how new regulations, new technologies, and customer behaviour will affect the markets and at what scale. But, once technology and policy-driven disruption in the energy sector becomes probable, the market’s reaction will be severe, instant, and long-term. Indeed, the financial sector is yet to factor in what an alignment with the Paris Agreement would mean for the use of fossil fuels. Some signs have already started to emerge. Peabody Energy, the largest private coal company globally, dusted USD 18bn of shareholders’ wealth in 2016, when it went bankrupt. It claimed that it would return with a bang in 2017, but 2019 was another blow to the company as its share plunged 70% gain in value.
The event had a lesson for the investors, and as we advance, they would think twice before catching the falling knife. In response to a global call to exit coal, many financial institutions away from investing in coal companies or related businesses. Over 112 globally significant banks and insurers have coal exit policies in place. These commitments are invariably accompanied by a commitment to align with the Paris Agreement. As many as 17 biggest insurers of the world have announced coal exit policies. These institutions control over 46% of the reinsurance market and 9.5% of the primary insurance market. One of the strongest policy decision has come from the European Investment Bank in November 2019. EIB announced: “The EIB will end financing for fossil fuel energy projects from the end of 2021”. The EIB will accelerate lending to technology solutions in the RE sector to ensure a just transition.
In the last five years, it has provided 65bn Euros of financing to renewable energy, energy efficiency, and energy distribution projects. In November 2019, BNP Paribas, the French banking company, announced a complete coal exit timeframe. It said, “to cease all its financing related to the thermal coal sector in 2030 in the European Union, and worldwide by 2040.” In the same month, UniCredit, the largest bank in Italy, released a new Environmental, Social and Governance (ESG) target. “UniCredit has committed to exiting thermal coal mining projects by 2023 fully. A new coal policy prohibits new projects in thermal coal mining and coal-fired power generation”. It is also committed to developing a system to assess their lending portfolios against the Paris Agreement’s goals, as per the Paris Agreement Capital Transition Assessment (PACTA) for international banks. In addition, UniCredit has signed up to external monitoring requirements via the Taskforce for Climate-related Disclosures (TCFD) to encourage firms to align financial disclosures with investors’ needs and take into account climate risk. Insurers are not just restricting new investment but also divesting from coal. They divested roughly $8.9 trillion, almost 37 per cent of the coal industry’s assets globally. There are several financial institutions in the USA, South Korea, Europe and many other countries that have announced the coal exist policies and stopped investing in new coal projects to support global efforts to tackle the climate crisis. The French Bank, BNP Paribas, is the largest lender for the renewable energy sector in Europe. It has defined a new financing target of €18bn by 2021. The investment by the banks and financial institution is picking up pace. It will undoubtedly accelerate the efforts targeted to reduce fossil fuel and promote sustainable alternatives.
According to a news report, at a time when financial institutions are not assisting coal companies, the renewable infrastructure sector of India significantly expanded its access to the global green bond market in the second half of 2019, with new issues by Adani Green (US$362m), Greenko (US$350m after just completing a USD 950m issue) and Azure Power (US$350m). The equity investors are also increasingly becoming aware of the dangers of climate risks. They are considering the impact of their investment on the climate. Global equity investors have launched a new campaign to ‘call out the Big Four global audit firms’ role – Ernst & Young, KPMG, Deloitte, and PricewaterhouseCoopers (PWC) – for ignoring the financial risks of climate change in their annual report audit sign-offs. The ordinary person is also concerned about environmental issues and making their day-to-day lives while keeping its impact on the environment. Though the number of such people could be less but the awareness among the masses is increasing. This is resulting in moving up of these issues on the political priority ladder. If all actors involved, including the public, policymakers, politicians, scientists, come together, there is no stopping to move away from coal swiftly without causing the problem to anyone.