Coal India – Challenges for Creating Long Term Value

Phasing out of coal is at the CenterStage of discussions at COP26 and the breadth and commitment by more than 20 countries signifies that world will be taking serious steps in transitioning towards clean energy by scaling renewables.  Existing Coal in a phased-out manner is becoming an inclusive agenda globally.

Liquidity is moving away from the coal-based project. Earlier HSBC which is one of the World’s leading financial institution has pledged to stop financing coal-based project including thermal coal mining in the OECD and European Union by 2030 and by 2040 in other parts of the world, to align the lending practice in line with the requirement of Paris Agreements. HSBC is counted and ranked as one of the top fossil fuel financers in the World.  Fidelity International, another major financial institution has also announced its commitment to phase out financing for the projects involving coal. Fidelity is of the view that coal pollutes heavily and globally it should not be part of future energy mix. 

To keep check on Global warming, World’s largest economies, G7 have already agreed to stop financing for the coal projects and phasing out of overseas fossil fuel financing including ending support for unabated coal power. Outside G7, major economies like China have committed not to build any new coal-based power projects abroad.

According to estimates, since the adoption of Paris Agreement, there have been a significant drop in number of new coal plants planned globally. Drop is equivalent to 76%, which equates with cancellation of more than 1000GW of new coal plants.

India ranks 2nd in the list of large coal producers in the World with a production share of approx.  716 Million tonnes (Mt) of coal in 2020-21. Despite mega growth in renewable capacity, Coal still remains the prime energy source in India as it is abundant and affordable and is directly linked to India’s energy security. India’s dependency on coal as a prime source of energy can be measured from the fact that more than 50% of the installed power capacity is linked to coal and Coal India produces more than 80% of overall coal -production in India.  

Discussion at COP26 makes it evident that the World will be moving away from the coal and the race for departure will be more aggressive. Banks, Financial Institution, Multilaterals and Supranational will be shying away from the financing thermal based projects. List of countries pledging to phase out coal in a time bound manner, will increase with time. ESG will be centre stage of investing and lot of money will be moving towards financing carbon neutral product and services.

India is one of the largest emitters in the World and will be playing an important role in transitioning towards Net Zero.  India under the leadership of Prime Minister Narendra Modi has committed to achieve target of Net Zero by 2070, while speaking at  COP26 climate summit in Glasgow. India will add non-fossil energy capacity to 500 GW by 2030, accounting 50% of the total energy requirement.

Indian Capital Markets is continually being impacted by the global trends in shifting towards green. Renewable Energies are commending higher valuation than their fossil fuel peers. If the market stops rewarding and financing coal-based projects, demand for coal will decline due to the underlying commerce. Also, the cost of borrowing will be relatively higher for the industries which are not transitioning toward net zero goal. Some of the announcement and partnerships at COP 26 are set to redefine the global procurement rules where collation of big companies is pledging to procure the goods and services which meets the green parameters. This will lead to tactical shift and value migration from coal dependent companies. Coal will lose the share in the future energy mix, not only in India but also globally and coal-based stocks will be impacted by it.

Bureau Galactik Views

Related articles