Views of Arvind Subramanian: “Coal and renewables must be the joint focus of policy”

“Coal and renewables must be the joint focus of policy”

Coal and renewables must be the joint focus of policy, says Arvind Subramanian, Chief Economic Adviser to the Government of India, as the country’s growing focus on renewables will result in a significant part of thermal assets becoming stranded, which is bound to impact the banking sector. Speaking at the Sixteenth Darbari Seth Memorial Lecture held recently at The Energy and Resources Institute in New Delhi, he cautioned that there are hidden costs associated with renewables which must not be overlooked. Excerpts from his addres…

India is now committed to installing 175 GW of renewables by 2022 which will account for about 21 per cent of the electricity generated from all sources. This emphasis on renewables comes against the recent history of a dramatic expansion, even over-expansion, in thermal capacity, predominantly in the private sector (218 GW of total thermal capacity at the end of 2016-17 with an eight times increase in private sector capacity to 84 GW between 2007 and 2017). This over-expansion, fuelled by the growth optimism of the mid-2000s, combined with stressed discoms and a slowdown in the economy, has led to plummeting plant load factors (PLFs), declining profitability, and stranded power assets, and, consequentially, stranded coal assets. All this can have a detrimental effect on the health of the banking sector, especially the public sector banks that are exposed to the power sector, and this in turn can adversely impact the health of the Indian economy.

Joint focus on coal and renewables

The discussion of renewables and coal must take into account India’s regional development realities. Coal is located predominantly in the poor eastern hinterland of the country, while the potential of renewables is, with the exception of Rajasthan, in the richer peninsular parts (Gujarat, Maharashtra and Tamil Nadu). Coal is both the source of livelihood for millions and an important source of fiscal revenue for many states. But it is also the source of several development pathologies – corruption, crime, mafias, etc. So, the rise of renewables poses a threat to those livelihoods and communities but it provides an opportunity to escape from the pathologies.

Coal and renewables must be the joint focus of policy. Institutionally, we have already done this in the form of one dynamic minister who is both the minister for clean energy and dirty energy, that is, renewables and coal. Second, the social cost of coal should include its domestic externalities, but at least for some time it should not include the international externalities. Third, we must be cautious about claims made on behalf of renewables – renewables will achieve true parity (in social terms) with coal only in the future. I do not think we are there yet.

Further, we must be aware of the “carbon imperialism” of advanced countries which risks biasing our judgements about energy. This carbon imperialism comes masquerading as a love of renewables. I think we should be careful about this and assess it from our own point of view. In addition, the social cost of renewables (because they may replace coal) should include the cost of stranding thermal and coal assets and include the cost of disrupting coal communities in India. Also, it must be noted that the current bids on renewables are not especially revealing or informative about the true costs of renewables, because of the extensive subsidies (implicit and overt, awarded by the centre and states) and strategic behaviour by renewables producers. There is a window, perhaps narrow, until renewables become truly viable, and that offers an opportunity for accelerating expansion in coal, and driving up capacity utilisation sharply in thermal power generation. Also, subsidising renewables at a time when they have not truly achieved parity with coal seems a double whammy for the government which then also has to pick up the tab for the resulting stranded assets in power and coal.

Now, the question is why are we all so enamoured with renewables? This is, first, because renewables offer a chance to strike at the problem of climate change and second, because of the decline in the costs of renewables. But as a country that is abundant in coal, exiting gradually from it will be fiendishly difficult and a healthy scepticism about renewables would be acceptable. It must also be noted that there are hidden costs associated with renewables due to their intermittency, low capacity utilisation factors, land acquisition requirements, cost of upgrading the grid, as well as subsidies. Proper estimates of the full costs – not just levellised costs – of renewables are still elusive.

Social cost of coal and renewables

The social cost of coal includes domestic and international costs. The domestic costs include the negative impacts of pollution, disease, water contamination, water usage and the displacement of people in order to open new mines. The international externalities include global warming. My view is that India should be entitled to not incorporate these international costs in domestic policy calculations. Only over time should India progressively internalise the cost of climate change. That is how equity in combating climate change should be addressed as it is primarily advanced countries that have created the problem of global warming.

Turning to renewables, the neglected social cost of renewables relates to the energy form it will displace – coal. Any cost-benefit analysis of the impact of renewables must take account of the near-term impacts of the financial and economic costs of stranding assets in power and coal (and knock-on effects on sectors such as the railways). A study commissioned by the Ministry of Power suggests that if thermal generation is displaced by renewables, that is, if we achieve our target for renewables, then it is possible that PLFs will decline by 13 percentage points, and that is a huge amount. PLFs are already low, and if you think about PLFs declining further, and the amount of exposure that banks have, the consequences for public finances are going to be very high. It is very difficult to put precise numbers on these impacts of declining PLFs but they could be substantial. For example, Economic Survey, Volume 2, estimates that the cost of stranded assets in power alone is Re 0.70-Re 0.80 per kWh. These would rise if the social costs of displacing communities are included.

Policy implications

A plausible strategy going forward must be to accelerate coal and thermal power and then phase it down after it is sufficient to provide at least the baseload power. The intuition here is simple: we should maximise the use of national assets to the greatest extent possible and then gradually ramp up the use of the free global assets – sunlight and wind – when it becomes advantageous to do so.

However, this proposed strategy raises two challenges of dynamic implementation, one on the political/social side and the other on the economic/financial side, which will need to be addressed. On the former, the question is this: how do you ramp up coal in the short to medium term while simultaneously preparing for its phase-down beyond that? On the latter, how do you slow down renewables today while creating the right incentives for the private sector to prepare for its ramp-up later when it achieves true parity? The first challenge will require careful planning to manage the gradual decline in the importance of coal, the impacts of which will be concentrated in a few areas geographically. At some point in the future, the incentives to use coal will diminish organically and social costs will truly change in favour of renewables.

Now how do we minimise the tension between coal and renewables? I think the growth in demand and technological progress in cleaning coal will help minimise some of the tensions. A rapidly growing Indian economy – at close to double digits – is of course the best guarantee of robust power demand. But the move to electric cars offers another opportunity to shore up electricity demand in the long run which can again minimise these tensions. On the second point about cleaning coal, India is committed to curbing climate change and to promoting renewables. However, technologies that are already available, such as carbon capture and storage, have proved prohibitively expensive. To discover truly effective technologies – that is to clean and green coal – the world collectively needs to embark on a programme akin to the Manhattan project that produced the first nuclear bomb.

To conclude, rapid changes in technology are promising to help realise the promise of renewables. This is an eminently desirable development and one that India is attempting. At the same time, these changes need to be seen in the context of the country’s current economic situation and its enormous endowments of coal which is still a very cheap way of providing energy to hundreds of millions who are still energy-deprived and not yet on the grid.