Adani Carmichael coal: Do we need it or not?

This is the second in a two-part series. The first part can be read here.

Do India's poor need coal from Adani's Carmichael mine?

We ended the first part of this series by talking about the Ultra Mega Power Plants (UMPPs) that Adani and Tata Power set up in Mundra, Gujarat.

Sure, UMPPs do offer economies of scale and more efficient technology. Given that we are likely to continue consuming coal for a while, the need for higher-quality coal, including through imports, is real.

But locking up nearly half of Gujarat’s power capacity in plants which were this reliant on imports? And then simply allowing costs to be passed on to consumers? That kind of ‘flexibility’ does not do much for India’s poor.

The high-powered committee’s other recommendations are apparently aimed at ‘offsetting’ this additional burden on consumers. These recommendations largely involve the distribution companies in Gujarat having the option to purchase more power from the plants under dispute. This includes an option to extend the power purchase agreement for a period of ten years (beyond its current 25-year period).

The Central Electricity Regulatory Commission’s 2019 Tariff Regulations explicitly define the ‘useful life’ of thermal power plants as 25 years. They should be shut down at this point, but are often allowed to continue generating at the discretion of the regulator, often with some extra tariff compensation to make technological upgrades.

This is based on a selective economic logic — at 25 years, a plant’s capital costs are largely recovered, making it a ‘cheap’ source of generation, if one ignores the health, social, environmental and climate costs of coal.

The high-powered committee does not mandate that consumers should use more coal power, but its recommendation effectively extends the country’s lock-in to coal. It is certainly not an alleviation of the burden on consumers from the passing on of import costs.

If anything, it is a version of the sunk cost fallacy, where consumers are locked into a price point for coal power based on a dubious reading of their interest, and then encouraged to further lock themselves in to offset the burden of the initial lock-in.

The other interesting ‘offset’ is the recommendation that the purchaser of power (usually a state electricity distribution company) be allowed to collect a portion of the ‘profit’ from the companies’ mines in Indonesia. This is an ‘innovative’ solution which raises many red flags.

For one, giving a distribution company an interest in a generation/mining company’s profits distorts the distribution company’s incentive to procure electricity at the lowest possible cost for its consumers. This is partly why there is a push (by the Niti Aayog, among others) to separate “carriage and content” ie. separate the generation and distribution of electricity.

The merits of a ‘free market’ for electricity are debatable, but it is an odd time to recommend an even tighter entwining of interests between distributors and a few particular generators.

For another, keeping track of the accounting practices of a company operating mines in a completely different jurisdiction is the type of solution which requires a high degree of regulatory and administrative oversight. Adani is currently in litigation over its alleged over-invoicing of coal imports in order to avoid paying customs duties.

The offending actions occurred between 2011 and 2015, administrative action was initiated in 2016, which was countered with litigation initiated in 2018. Several obstacles still remain in investigating — let alone recovering — the alleged losses to the exchequer.

So again, not really an offset; rather, the Indian consumer is given an incentive to continue supporting coal extraction abroad. Both the ‘mining profits’ and the ‘power purchase extension’ recommendations are arguably a subsidy to coal miners and coal power generators. At the very least, they make it more difficult for the consumer to turn away from coal, increasing the cost of transition to cleaner energy sources.

These recommendations were accepted in a decision of the Central Electricity Regulatory Commission in April 2019. The Supreme Court may well follow suit. A political solution is now being stamped with the authority of the legal system. This is the context in which Indian consumers should view Adani’s operations in Australia.

In theory, we are pitting Indonesia and Australia — two major coal producers — against each other. In theory, the upside is a lower cost of import, the downside is a higher dependence on political decisions abroad, outside the control of the Indian consumer.

In reality, our domestic political economy means that the consumer (particularly the poor) will see little of the upside while bearing most of the downside.

With support from the Australian government, the Indian government, and multiple large corporate interests, Carmichael looks like a classic ‘too-big-to-fail’ creation. Indians bear comparatively limited responsibility for the climate crisis, but we still bear the responsibility to think for ourselves.

If we are ramping up coal production abroad at a time the Inter-governmental Panel on Climate Change and the United Nations indicate that it should be dropping sharply, we better be quite clear on what we are getting ourselves into.

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