Coal, energy and development

Renewables may be the future, but are they the present?

Three important features define the background for discussions on renewables and coal. 

First, under the leadership of the Prime Minister, India led the initiative to launch the International Solar Alliance at the Paris meeting in December 2016, underpinned by an enhanced domestic effort to dramatically increase renewable capacity to 175 gigawatts by 2022. 

Second, this renewables push comes against the recent history of dramatic over-expansion in thermal capacity fuelled by the growth optimism of the mid-2000s. This combined with financial stress in discoms has led to plummeting capacity utilisation (plant load factors or PLFs), and raised the spectre of stranding thermal power and coal assets. As power prices are renegotiated because the discoms are themselves financially strapped, this stress is extending to renewables themselves. The health of the banking sector, especially public sector banks, and in turn that of the economy, already afflicted by the Twin Balance Sheet (TBS) challenge, have been adversely impacted. 

Third, coal is located predominantly in the poor, eastern hinterland while the potential of renewables is mostly in richer, peninsular India. Coal provides livelihoods for millions and fiscal revenues for many states. But coal also creates several development pathologies — corruption, crime, mafias, insurrection — the so-called “resource curse.”

Ten propositions: We offer 10 propositions for public deliberation. 

• Coal and renewables must be the joint focus of policy; 

• Proper social costing suggests that, for India, renewables will achieve true parity with coal only in the future;

• The social cost of coal should include all its domestic externalities, but at least for some time, not the international externalities;

• The social cost of renewables should include the costs of stranding thermal power and coal assets;  

• Current bids on renewables are not especially revealing or informative about their true costs because of extensive subsidies (implicit and overt) and strategic behaviour by producers; 

• Subsidising renewables at a time when its social costs are above those of coal is a double stress for the government, which then also has to pick up the tab for the resulting stranded assets;

• There is a not-so-wide window, until renewables become truly viable, for accelerating expansion of coal, and driving up PLFs in thermal power; 

• This strategy will raise two dynamic implementation challenges, one on the social side and one on the economic side; 

• We must beware “carbon imperialism” of advanced countries, which risks biasing our judgements about energy; and 

• Rapid growth in energy demand and collective international efforts towards developing technologies for cleaning coal will minimise tensions between coal and renewables.

Costing and policy implications: For coal, social costs must distinguish domestic from international. The former includes the negative impact on air pollution, disease, water contamination, water use in coal power production, and the human displacement associated with newer explorations. However, social costs of thermal power may be overestimated to the extent that worse forms of energy are replaced. 

Social costs also include the international externality of thermal power contributing to global warming. But India should internalise the international marginal cost only progressively. That is the way to achieve equity in climate change actions, with advanced countries bearing the full costs early both because of their greater contribution to the problem and their greater ability to address it. 

Proper costing of renewables should incorporate intermittency and storage needs, lower capacity utilisation, land acquisition, and building and upgrading transmission grids to equip them for renewables, and should exclude subsidies.

Long-run decisions on renewables must consider investments already incurred in the energy forms they will displace — thermal power and coal. Hence, the social costs of renewables must consider the social and economic impact of stranding thermal and coal assets, especially since exit will be politically difficult.

Our provisional assessment is that for India and for some time, the social costs of renewables are likely to exceed those of thermal. Broadly, CO2 emissions have to be priced at $50 per ton for renewables to achieve parity with coal-based power. India’s current valuation — revealed in the government’s coal cess — is about $10 per ton. Even in Europe, CO2 emissions are trading at around $7 per ton.

A plausible strategy going forward — illustrated in the chart — is to accelerate thermal generation in the window when coal remains socially less costly than renewables, and phasing it down thereafter, consistent with providing the base load. Reforms of the coal sector and discoms to ramp up production and efficiency in coal production and thermal power generation are urgent. 

Another corollary is to reduce subsidies for renewables, which create a double burden for the government which also has to bear the burden of the losses from stranded thermal and coal assets. 

India needs coal in the short-medium term. Renewables are part of the answer but they also come with hidden costs that must not be overlooked. India cannot allow the narrative of “carbon imperialism” to impede rational, realistic planning for the future. Technological progress in cleaning coal will minimise the tensions between coal and renewables. However, this cannot be achieved by India alone. The world needs to collectively embark on a programme to green and clean coal. That, rather than unconscionable calls to phase out India’s cheapest form of energy, would best reconcile the domestic imperative of universalising energy access with international efforts to combat the existential threat posed by climate change.

This is an edited excerpt of the 16th Darbari Seth Memorial Lecture delivered at TERI by the chief economic advisor on August 17. Rangeet Ghosh and Navneeraj Sharma, who are members of Subramanian’s team at the Ministry of Finance, contributed to this report