India is steadily inching towards an era of Cleaner Energy, marking a crucial shift in its electricity generation process from Coal Plants towards greener alternatives. However, this paradigm shift has not been devoid of uncertainties, mainly pertaining to the risks associated with the decommissioning of Coal Plants.
The Current Landscape of India’s Transition towards Cleaner Energy
Over the past five years, there has been a noticeable decline in financing for new coal power projects. In contrast, funding for Renewable energy-based projects has been on an upward trend. Despite coal still playing a dominant role in India’s energy landscape, the shift towards renewable energy has been remarkable. In the 2022-23 period, renewables made up 41% of India’s total capacity, a significant rise from only 32% in 2011-12. Interestingly, since 2017, the annual increment in renewable energy capacity has consistently surpassed that of coal power. As of now, approximately 23% of India’s energy mix is attributed to clean energy, while coal caters to over 55% of the nation’s energy requirements. To keep the global temperature rise below 1.5°C, the pace of transition towards renewable energy sources needs to be accelerated further.
Economic Considerations tied with India’s Energy Transition
Risks of Stranded Assets
Assets at risk of an abrupt devaluation or conversion into liabilities due to unforeseen changes in the market, regulations, consumer preferences, and technology are termed stranded assets. This notion brings potential risks to the table, especially for banks and financial institutions with direct or indirect links to the fossil fuel sector.
Financial Implications
The financial implications tied with the decommissioning of coal plants in India are a subject of concern. The average age of coal plants being merely 13 years, financial institutions bear a substantial loan burden, primarily public sector banks and Non-Banking Financial Institutions (NBFCs), which account for about 90% of the loans associated with coal projects. It’s also worth noting that private banks have significantly reduced their financing to coal-fired thermal power plants.
Regional Vulnerabilities
Regions like Chhattisgarh, Odisha, and Jharkhand, having a sizable share of stressed assets in state coal power capacities, are more vulnerable to financial losses due to asset devaluation as India progresses towards sustainable energy practices.
Suggested Measures to Ensure a Smooth Transition
The transition away from coal calls for the government to devise robust policies and regulations, thus providing clarity and predictability for investors. An environment of clear guidelines and supportive policies can reward the shift towards renewable energy sources and concurrently mitigate accompanying risks. Banks and financial institutions should take a proactive approach, carrying out comprehensive risk assessments, including stress-testing and scenario planning, to foresee the potential impacts of stranded assets and develop effective risk management and mitigation strategies.
Financial institutions should also consider diversifying their investment portfolios, gradually reallocating funds from fossil fuel-dependent assets towards renewable energy projects. This measure has dual advantages, it can help minimize the risks linked with stranded assets while aligning with global sustainability objectives.
