$15 billion worth of coal power plants are on sale in India but nobody wants to buy them

Out of steam.
Out of steam.
Image: Reuters/Jason Lee
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Billions of dollars worth of coal-fired power plants are on the block in India but no one seems to want to touch them with a bargepole at the moment.

Although an exact number is hard to find, analysts estimate that up to 30,000 megawatts (MW) of thermal power capacity may be up for grabs as debt-laden Indian companies look to trim the fat and focus on profitable businesses. On June 05, a report in the Business Standard newspaper (paywall) put the figure at 25,000 MW, including assets of companies such as Jaiprakash Associates, Lanco Infratech, and KSK Energy.

Going by a conservative price of between Rs5.5 crore and Rs6 crore for each MW, according to Rupesh Sankhe, senior analyst at brokerage Reliance Securities, the combined worth of these projects is well over a staggering Rs1 lakh crore (more than $15 billion).

The current situation is partly a result of a decades-old policy of the government allocating coal blocks to private companies, which was eventually struck down by the supreme court of India three years ago. In September 2014, the court cancelled the allocation of 214 coal blocks and asked the government to auction them instead. Back then, the Coal Producers Association, an industry group, had warned that (pdf) some 28,000MW of capacity would be impacted by the deallocation.

“When they set up the plants, they hadn’t considered what would happen if the coal linkage didn’t come through,” Sankhe said. “In many cases, the blocks got deallocated.”

The other problem is that many of these distressed projects didn’t have long-term power purchase agreements (PPAs), which means there’s no guarantee that the power they produce will be purchased. “They must’ve thought we’ll get coal, and then when the states invite bids, they’ll get the PPAs,” Sankhe said. Besides, the basic assumption was that power demand would continue to grow robustly, in tandem with economic growth. “When the capacity addition happened, companies assumed a GDP growth of between 8% and 9%,” said Sankhe.

The actual GDP growth numbers turned out to be somewhat more muted, and the PPAs haven’t materialised because demand has flatlined. “Earlier the issue was both PPAs and coal availability,” said Sudhir Kumar, an analyst at CARE Ratings. “Currently, I think the issue is with no demand being there and no PPAs being offered by state utilities.”

Kumar points out that, compared to five years ago, the plant load factor (PLF), i.e. the actual output of a plant compared to its maximum capacity, has declined by 10% nationwide. “That means there is a decline in power off-take (purchase),” he added.

On top of all that, the dramatic drop in renewable energy prices, particularly solar, have fallen to a level where some projects are cheaper than coal-powered electricity. Alongside, a draft report by the Central Electricity Authority estimates that, because of overcapacity and flagging demand, India won’t need another coal-fired power plant before 2022. Clearly, the allure of coal is waning.

The sector’s future now hinges on how quickly India’s economy is able to resuscitate itself and get back to a growth level where there’s an increase in the overall demand for power. “If (the) Indian economy moves up, demand moves up, then everything else should also subside,” said Kumar.