India's two largest import-coal plants suffering severe financial dilemma

No progress has been made on proposals to sell them out.

New developments in both the political and energy scene in India are increasing the possibility that Adani would be unable to export coal to India if it builds its proposed Carmichael mine in Australia’s Galilee Basin.

According to Tim Buckley and Simon Nicholas of the Institute for Energy Economics and Financial Analysis (IEEFA), India’s two largest import-coal power plants – Adani Power’s 4.6GW Mundra plant and Tata Power’s own 4.0GW Mundra plant — are both struggling financially, losing money with every unit of electricity produced. Remarkably, management at both companies put the equity of these two power plants up for sale at just 1 rupee (1.6 U.S. cents) each back in May 2017, but nothing has progressed on this proposal since then.

We would speculate that the ruling BJP government in Gujarat, where both plants are located and play a critical supply role for the state, did not want to be seen to be bailing out two Indian billionaires going into a crucial state election. Prime Minister Narendra Modi’s BJP won re-election in the Gujarat State election in December 2017, albeit with a reduced majority. Now that the election is over, the proposed state bailout of the two Mundra import coal power plants is likely to be back on the agenda.

With the Government of India gearing up to hold a record high 45 GW of renewable energy tenders over the new financial year starting April 2018 (30 GW of solar, 10 GW of onshore wind and 5 GW of offshore wind), the Indian electricity sector transformation is set to accelerate, with clear new commitments from the Indian government. The energy program is being expedited thanks to the expanding global capital flows into the Indian renewables infrastructure sector.

Yet another 500MW solar low priced auction was finalized in December 2017. Last month also saw the continuation of wind tariffs hitting successive new record lows, as was seen with the Gujarat government’s 500MW auction taking wind down another 8% on the previous record low set in May 2017. This price matches Indian solar at just Rs2.43/kWh or US$38/MWh – 20% below the cost of existing domestic thermal power generation in India. Further expansion of domestic coal mining capacity is likewise setting up 2018 as another year of declining thermal coal imports into India.

To IEEFA, all of these new developments make Adani’s Carmichael coal mine proposal of zero strategic value to India, and the proposition to import coal into India is now clearly commercially unviable. IEEFA would view any sale of these two financially stressed plants as a potentially important win for the state and consumers. Post any acquisition, the Gujarat government could access lower cost domestic coal linkages not available to private power companies, replacing the reliance on expensive imported coal. Any sale to the government would thus accelerate the phase out of thermal coal imports for India overall. This yet again confirms the Carmichael proposal is a stranded asset absent massive government subsidies.