India coal costs wildly understated

 IEEFA has already done a piece on Ozzie coal capacity utilisation.  This extends the analysis to India.

From IEEFA

India’s future coal-fired power project pipeline carries a massive stranded asset risk due to the collapse in the average utilisation rate of its coal-fired power fleet leading to an underestimation of financial risk for new projects, finds a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).

There are currently 33 gigawatts (GW) of coal-fired power plants under construction and another 29GW of proposed projects under various stages of regulatory approval in India.

Author of the report, energy finance analyst Kashish Shah says the LCOE (levelised cost of energy) is the required tariff at which the net present value of the investment is zero.

“In other words, LCOE is the minimum required average tariff for a power asset to reach a breakeven return at the end of its life. Anything less than that suggests the asset is unviable.”

Shah found that the average utilisation rate of India’s coal-fired fleet has collapsed to a financially unsustainable low of 53% in financial year (FY) 2020/21 from a high of 78% a decade ago in FY2011/12.

For most coal plants in India, the LCOE is calculated with an assumption of utilisation factor of 85-90% throughout the life of the project. However, the [actual] LCOE turns out to be 64% higher with India’s [actual] average capacity utilisation factor sitting at ~55% for the last few years.

“The aspiration for further builds of coal capacity stems from the notion that coal is still ‘cheap’,” says Shah. “However, with tariffs now below Rs2/kilowatt hour (kWh) (US$27/MWh), solar power is cheaper than even the variable cost of coal-fired power and is ready to absorb incremental daytime demand.”

IEEFA’s report highlights that utilisation factors of coal-fired power plants have declined not just in India, but across major electricity markets including China, the United Kingdom (UK) and the United States (U.S.).

“With zero fuel costs, the marginal cost of generation for renewables is practically zero,” says Shah. “On the other hand, with increasing inflation in Indian domestic coal prices and railway transportation costs for coal, the gap between cost competitiveness of renewables versus coal is widening.

“This raises a serious concern about the viability of coal-fired power plants.

“Debt servicing for underutilised coal-fired power assets becomes extremely difficult and creates a liquidity crunch in the whole value chain. The financial stress then spills over to the power distribution sector as well as affecting India’s financial lending institutions. This further inhibits growth in other important segments of the power industry such as renewables and transmission infrastructure, which are extremely critical for India’s electricity sector transition.”

The report concludes that the financial viability of India’s proposed and under construction coal-fired power projects should be re-evaluated based on the right estimation of utilisation factors including LCOE and capacity factor to avoid further bloating of India’s non-performing assets.

IEEFA points out that the cost of new-build solar is below the variable (operating) cost of coal.  It's cheaper to build new solar farms than to dig out, ship, and burn coal to make electricity.   Yet coal power stations are stuill being built because they are "cheap".

With falling capacity factors, gas and coal overvalued

 When we calculate the costs of different generation technologies, we use the LCOE (levelised cost of electricity), which makes it easier to compare costs across generation types.

Basically, you take the output over the lifetime of the asset, and divide it by the cost of construction and operation, PV-ing that back to the present.  To calculate the output, it is usual to use a 'capacity factor'.  For example, solar has a capacity factor of around 25%, which means its output is about 25% of its nameplate capacity.  The capacity factor for fossil fuels is assumed to be flat over time, determined by technological (downtime for maintenance and repair reducing capacity, for example) rather than demand constraints.  But falling demand as renewables increase their market share means that fossil fuel capacity factors are falling.  This increases their LCOEs, making them even less competitive.

From IEEFA:

The Australian government may be relying on inaccurate financial assumptions for its gas-fired recovery as most gas- and coal-fired power plants in Australia, the UK, the U.S. and China are being operated less and less – what’s called a declining capacity factor, finds a new report by the Institute for Energy Economics and Financial Analysis (IEEFA)

Report author and LNG/gas analyst Bruce Robertson says a declining capacity factor poses serious risks to investors in fossil fuelled power plants if they have relied on financial modelling which anticipates power plants having a constant capacity factor throughout their lifetime, meaning they expect a plant to produce electricity at a constant level, every year, until the end of its life.

“Far from being constant, our research shows that the capacity factor for coal-fired power plants has been declining globally since before the beginning of last decade – with many soon to become stranded assets,” says Robertson.

“Similar to the downward trend in coal, the capacity factor of gas-fired power plants’ is also forecast to decline.

“Yet financial modellers are still basing their calculations on the assumption power plants are producing ‘constant’ power over their lifetime. This leads to an underestimation of the cost for each unit of electricity to be produced over the power plant’s lifetime – what’s called levelized cost of energy (LCOE). And this cost underestimation causes a financial overvaluation of the energy asset, which can mislead potential investors.

“Investors should take note.”

[The report] found widely cited energy authorities including the U.S. Energy Information Administration (EIA), the International Energy Agency (IEA) and the Commonwealth Scientific and Industrial Research Organisation (CSIRO), in addition to financial institutions, continue to rely on a ‘constant’ rate of capacity factor in their LCOE calculations.

IEEFA’s research however demonstrates a declining (not constant) capacity factor of fossil-fuelled power plants in four key regions across the globe: Australia, China, the UK and the U.S.

The capacity factor of coal-fired power plants operating in Australia’s National Electricity Market (NEM) has declined by about 24% since 2008, and by about 19% in China since 2007.

“Linear forecasting shows the capacity factor of coal-fired plants in China will fall below 40% in the next 4 years,” says co-author and energy analyst Milad Mousavian.

The UK’s collapse in capacity factor has caused numerous stranded assets, with the UK’s coal era now forecast to end in 2022.

In the U.S., research from think tank RethinkX shows the capacity factor of coal-fired power plants is forecast to drop to 10% by 2035, while a huge drop in capacity factor for gas-fired power plants is forecast to begin from 2022.

Australia’s NEM data shows an even more severe drop than that occurring in the U.S.

Gas peakers and combined cycle gas turbines (CCGT) power plants have been experiencing falls in capacity factor since 2010 and the average capacity factor of all gas-fired power plants in the NEM has fallen from 27% to just 16% in the last decade.