Commenting on reports that Energy Minister Piyush Goyal said India would be forced to keep importing coal, including from the proposed Carmichael mine in Queensland, Tim Buckley, Director of Energy Finance Studies Australasia at IEEFA said:
Some Indian power plants may have been designed to run on foreign coal, but they can no longer afford to do so. This can be seen by the economics of Adani Power’s 4.6GW Mundra import coal-fired power plant and Tata Power’s 4.0GW Mundra plant, both of which are no longer competitive.
The Adani Mundra plant has previously been disclosed to be operating with 100% import coal from Indonesia. Adani Power has been operating at a net loss, and has been doing so for the last 7 years.
However, following its financial year 2016/17 results, the company disclosed that Phase IV of the Mundra power plant was operating using 100% domestic coal. At 1,980MW, Phase IV represents 43% of the total capacity of the Mundra plant. Adani Power also reported that the earlier Phase I & II units had originally operated on 30% domestic coal as well.
The Mundra plant is by far Adani Power’s largest and is the intended destination for the majority of the company’s thermal coal imports from the Carmichael proposal under Adani’s ‘pit to plug’ strategy.
After the adverse Supreme Court ruling disallowing any revision of the tariff to compensate for higher cost imported Indonesian coal, Adani Power discontinued 1,250MW of power supply from Mundra due to the unviability of running those units on imported coal.
These plants will curtail production rather than lose money with every unit of production. It is a likely conclusion that a US$1-2 billion writedown of Adani Power’s US$5bn plant is in the cards. As it stands, this plant is a clear stranded asset.
Only last week it was reported that Adani Power has approached state-run Gujarat Urja Vikas Nigam (GUVNL) to bail out its Mundra power plant. It has been reported that one option is for GUVNL to take a majority stake in the Mundra plant post a writedown of equity.
Post acquisition, the Gujarat government can access domestic coal linkages and/or gain new coal block, plus refinance the US$3.1bn of debt attached to the Mundra plant with lower cost government subsidised finance from Power Finance Corp (PFC) or the Rural Electrification Corp (REC).
A written-down plant can be reconfigured to be viable, particularly if cheap (US$20/t) domestic coal can be procured in proximity to the plant without exorbitant rail freight costs.
However, a key requirement is that blending in low energy, high ash Indian coal requires high quality existing Australian thermal coal which is high energy, low ash.
The Carmichael proposal is low energy, high ash and far from ideal for blending with cheap domestic Indian coal.
Energy Minister Piyush Goyal’s strategic aim to cease non-coast power plant usage of imported thermal coal within the next two to three years means domestic operators will need to reconfigure their plants so that they can use domestic coal.
In May 2017 the government stated that it was considering auctioning Coal India’s domestic coal for supply and blending at import coal-based power plants where possible.
As India works through and resolves domestic supply shortages, the need for imported thermal coal will continue to progressively decline.
India targets for all public sector undertakings to be using 100% domestic coal by 2017/18, following NTPC’s move to virtually cease coal imports in 2016/17.
As proof of the gradual success of this program to protect India’s current account deficit and currency, Indian coal imports peaked in 2014/15, and have progressively declined since then. May 2017 saw a 6% year on year decline for the month.
According to management, Adani Power’s Mundra plant isn’t financially viable, even with some percentage of domestic coal being used. As such, the ‘pit to plug’ strategy falls over and the rationale for the Carmichael proposal disappears.