Blackrock, the world’s largest asset manager, last week announced that it would cut exposure to companies that generate more than 25% of their revenue from thermal coal. With about $7.4 trillion worth assets under their management, the announcement is likely to cause ripples in the world of energy financing. The move, expected to be implemented by mid-2020, comes after disinvestments worth $11 trillion were reported in the “Financing the Future” summit held in Cape Town in September last year. For many, Blackrock’s announcement is the clearest sign yet that private investors are steadily steering away from fossil fuels, and particularly coal, for future investments.
The drift of private finance away from coal is ostensibly linked to trends in western Europe and the US, where both thermal power and coal production have peaked. But while coal might have stagnated in the West, the situation is starkly different in Asia where relatively dirty thermal power is likely to be an important source of energy for up to six more decades. Provided, of course, the market doesn’t kill the sector first.
India, where thermal power is expected to be the dominant source at least until 2050, is in the midst of reforming its massive coal sector. This fortnight, the country made its biggest leap yet in this endeavour by approving, for the first time ever, 100% FDI in coal mining and the termination of end-use restrictions that limited coal production to just few captive mines held by steel manufacturers and power companies, apart from state-owned entities. The decision effectively ends the monopoly of Coal India Ltd (CIL) in coal production, and opens up the sector to investments from companies seeking to gain access to cheaper fuel or to sell coal on the market.
The move to liberalise the sector comes after a spell of sluggish coal production where shortfalls had to be met with imported coal. India imported a record 235 MT of coal worth almost Rs3 lakh crore in the last year, out of which 135 MT, mostly thermal coal, worth about Rs1.71 lakh crore could have been met with domestic reserves, which are the fourth largest in the world. This fiscal year, worker strikes and monsoon flooding saw CIL produce just 390 MT of its 660 MT target for the year in the first nine months. The shortfall was once again met with 163.86 MT of coal imports until October. While imports have come down in the three months since, the reasons are more to do with India’s ongoing economic slowdown, which has seen demand shrink rather than any serious uptick in domestic production.
The Centre had initially set a target of producing 1.5 billion tonnes of coal domestically by 2020, of which 1 BT was to be produced by Coal India and the remainder by non-CIL sources. With CIL struggling to meet its targets, the timeline has now been revised to 2023-24. While Coal India itself has been flagged for serious concerns, particularly regarding the flouting of environmental norms, the Indian government, over the past year, has moved aggressively to open up the sector and attract global investments. In the first such coal mine auctions in four years since the SC ordered the cancellation of all licenses granted during the last round, five mines were allotted to Birla Corp, Vedanta, Prakash Industries and Powerplus Traders, with the option of selling up to a quarter of the output on the open market. India’s plans for the immediate future involve the auctioning of 200 coal blocks in the next five years, while further regulatory reforms are also on the cards. A proposal from the PMO has also reportedly recommended doing away with the coal cess of Rs400 per tonne of coal mined in a bid to completely end reliance on coal imports for thermal power.
The decision to liberalise coal in a bid to attract investments, while arguably beneficial in the face of India’s coal shortages, is hardly in line with global trends of private investments. The Blackrock announcement, although criticised for not going far enough, is still a clear signal of private investors moving away from fossil fuels and towards low-carbon technologies and sources of power. It is also a sign that globally, investors are becoming increasingly wary of the quickly diminishing costing advantages that coal holds over renewable sources such as solar and wind. Earlier this week, the annual risk report released at the World Economic Forum in Davos, Switzerland revealed that climate impacts dominated the concerns held by the world’s biggest financial players.
Although India has now opened up coal production to 100% FDI, Blackrock and other large private asset managers distancing themselves from coal could imply that India will have to look domestically to finance its big coal push, even as the commodity loses its economic sheen globally. From a forward-looking perspective, this deafness to global cues could have devastating impacts on the future. For one, India’s continued reliance on coal will be a drag on global climate efforts as developed nations accelerate their pull-back from thermal power. But perhaps more worrying is the fact that while improvements in efficiency of renewables and further decline in prices of renewable energy is on the cards, thermal power is only due to get more expensive over the coming decades. With India attempting to once again walk the tightrope between coal and renewables and hedging its bets on both, a poorly planned drive to increase coal production in the country could end up in financial devastation with several stranded assets in just a decade’s time, added to the already exhaustive list of non-performing entities.