What’s Driving India’s Coal Demand Growth

1st Jun 2016

First published in Cornerstone, Volume 4, Issue 1

As noted in the International Energy Agency’s (IEA) World Energy Outlook 2015, India is in the early stages of a major transformation.1 While other BRIC (Brazil, Russia, India, and China) nations face another year of economic uncertainty, the World Bank suggests India’s GDP will grow by 7.9% in 2016, more than twice the global average.2 Economic growth and modernization will in turn drive energy demand, especially for coal.

Moreover, Indian appetite for coal will rise as the government enacts policies to assist those affected by energy poverty. The IEA has estimated that around 240 million people, or 20% of the population, remain without access to electricity.1 Of equal concern, the agency estimates that 840 million people—more than the populations of the U.S. and the European Union combined—use traditional biomass for cooking.1 Unsurprisingly, in a speech earlier in 2015, Piyush Goyal, Minister of State for Power, Coal and New and Renewable Energy, stated that “universal and affordable energy access 24/7 … is the mission of this Government under Prime Minister Modi.”3

McHugh Opening Image

With an expanding population and an economy poised to grow quickly, India will require more energy to meet its development objectives.

India is currently the world’s third largest energy consumer;4 this position will be consolidated over the coming years, driven by economic development, urbanization, improved electricity access, and an expanding manufacturing base. Indeed, the IEA forecasts that India’s energy consumption will be more than OECD Europe combined by 2040, and rapidly approaching that of the U.S.4

Like China before it, India’s economic growth will be fueled by coal. Thus, in 2012, 45% of total primary energy demand and 72% of generated electricity demand was met by coal. India currently has approximately 205 GW of coal-fired electricity generation capacity, which will soon be augmented by 113 GW of new coal-fired capacity currently under construction.4

Recognizing India’s growing role in the international coal market, in late 2015, the World Coal Association (WCA) published “The Case for Coal: India’s Energy Trilemma”.5 This article provides a synopsis of the report’s major findings.

GOVERNMENT POLICIES TO MEET GROWING ENERGY NEEDS

The Indian government’s policies to meet the growing need for electricity are focused, principally, on developing large-scale coal-fired power plants. Indeed, in March 2015, Arunabha Ghosh, head of the Council on Energy, Environment and Water think tank in New Delhi, told the UK’s Financial Times that “whichever way you cut it, coal is going to be front and centre of India’s future energy mix…”.6

Over the next 25 years, electricity demand in India is forecast to grow at over 4% per annum. Under its New Policies Scenario, which modeled energy demand and supplies if all new and proposed policies were fully enacted, the IEA estimates that installed coal capacity will reach almost 500 GW by 2040 (more than three times the 2012 installed capacity) (see Figure 1). Although comparatively lower, under the 450 Scenario—in which the concentration of CO2 in the atmosphere would be kept to 450 ppm, the concentration estimated to lead to no more than 2˚C warming—increases if coal-fired capacity exceeds 300 GW by 2040.7

McHugh Figure 1

FIGURE 1. India’s installed capacity: IEA New Policies Scenario1

The dominance of coal in India’s energy mix can be attributed to two key factors: affordability and access. Although the competitiveness of renewables and gas-fired technology is likely to improve over time, coal is expected to remain the most affordable option through to 2035, driven by low domestic coal prices and limited gas availability (see Figure 2).

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FIGURE 2. India’s levelized cost of electricity 20357

Over the last five years, approximately 87 GW of new coal-fired capacity has been added to the grid; around 70% of this capacity has used subcritical technology. Despite the significant efficiency and emission rate advantages of high-efficiency, low-emissions (HELE) technology, the capital cost advantages of subcritical plants has resulted in their preference. A forecasted 88 GW is scheduled to come online by 2018, with around 32 GW of this subcritical. In addition, India currently has a further 292 GW of coal capacity in the planning stages. The IEA estimates that India will require around US$1.2 trillion investment through to 2040 in order to meet its ambitious capacity expansion.7

With such a large expansion program planned for the coming decades, the choice of technology deployed will have significant implications for the expenditure required. Looking ahead, the Government appears to be preparing the 13th Five-Year Plan (2017–2022) to call for the development of 100% supercritical coal plants. Cost differences, however, could impact developers’ choices. There is as much as a 40% price difference between the capital costs of an ultra-supercritical and a subcritical coal plant. Analysis show that if all coal plants built from 2020 onward were ultra-supercritical, total capital expenditure would reach $500 billion by 2040, compared to around $387 billion if all coal plants built from 2020 onward were subcritical.

IMPLICATIONS OF ENERGY TECHNOLOGY CHOICES

Leaving cost considerations aside, there are clear benefits for deploying supercritical or ultra-supercritical technology. Replacing the subcritical capacity currently in the development pipeline with supercritical or ultra-supercritical capacity would translate into significant reductions in CO2 emissions for India over the life of the power plants (see Figure 3).

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FIGURE 3. The environmental benefits of deploying cleaner coal technology in India

Replacing subcritical with supercritical and ultra-supercritical coal technology reduces CO2emissions at a cost of around $10/tonne in 2035 (see Figure 4). By comparison, abating a tonne of CO2 through the deployment of large-scale solar PV in India can cost up to $40/tonne, even accounting for the cost declines expected through 2035 (~$16/tonne under a low weighted average cost of capital and low capital cost scenario).

FIGURE 4. Avoided cost of CO2 in India, 2035 (subcritical coal plant used as baseline) *No CO2 price assumed

FIGURE 4. Avoided cost of CO2 in India, 2035 (subcritical coal plant used as baseline)
*No CO2 price assumed

CO2 ABATEMENT OF ULTRA-SUPERCRITICAL COAL COMPARED TO RENEWABLES

Building on these abatement findings, WCA’s “Case for Coal” report considers the impact of spending US$1 billion across different generation options in India and Europe. The research takes into account differences in the levelized cost of electricity (LCOE), emission rates across technologies, and the marginal generation technology in each region.A

As illustrated in Figure 5, the US$1 billion expenditure can result in more generation (in TWh) and higher CO2 emission reductions when spent in replacing subcritical plants in India compared to replacing combined-cycle gas turbines (CCGT) with renewable technologies in Europe.

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FIGURE 5. CO2 abatement potential of cleaner coal technology in India compared to renewables in Europe

For comparison, the report also considered deployment of solar PV.5 Analysis indicates that although renewable technologies in India could result in high emissions abatement, they do not provide the scale of generation growth required to meet electrification targets.

LOW-EMISSIONS COAL TECHNOLOGY FOR COST-EFFECTIVE CO2 ABATEMENT

The findings of the “Case for Coal” report have important policy implications for governments and should be analyzed carefully when assessing climate change initiatives. The report demonstrates that, on a generation basis, coal has the potential to deliver the most TWh of all technology options (assuming the same expenditure on an LCOE basis, see Table 1). Moreover, deploying HELE technologies delivers the most cost-effective form of CO2 abatement when compared to subcritical coal, without sacrificing legitimate economic development and poverty alleviation efforts. It is worth noting that this understanding provided the framework for India’s Intended Nationally Determined Contribution (INDC) filed for COP21, which raised the profile for the role of HELE technologies.

McHugh Table 1

TABLE 1. 2015 technology comparison in India (in $2014)

Expanding efficient utilization of coal will help address India’s energy trilemma of meeting demand, reducing energy poverty, and actively participating in mitigating global climate change. Importantly, this model of development is not limited to India; it may be applied to a number of emerging economies and forms the foundation of the Platform for Accelerating Coal Efficiency, an initiative that the WCA continues to pursue in 2016.