Risks Associated with the Decommissioning of Coal Plants

• 01 Dec 2023

For Prelims: Risks Associated with the Decommissioning of Coal Plants, Transition towards Cleaner Energy, Risks of Stranded Assets, Public sector banks and Non-Banking Financial Institutions (NBFCs).

For Mains: Risks Associated with the Decommissioning of Coal Plants.

Source: TH

Why in News?

India is progressing slowly towards Cleaner Energy. However, this noticeable shift towards cleaner energy sources in electricity generation is causing apprehensions about the risks associated with the decommissioning of Coal Plants.

What are the Current Trends in Transition towards Cleaner Energy?

• Financing for new coal power projects has declined over the past five years, while there has been a steady rise in financing for projects based on Renewable energy sources.
• Coal continues to dominate the energy mix, there has been a notable increase in renewable energy generation capacity in India.
• Renewables constituted 41% of the total capacity in 2022-23, marking an increase from 32% in 2011-12. Moreover, the yearly increase in renewable energy capacity has surpassed that of coal power since 2017.
• While clean energy in the electricity mix has increased to about 23%, over 55% of India’s current energy needs are still being met by coal. The acceleration of this transition towards greener energy is essential to keep the global temperature increase below 1.5°C.

What are the Economic Implications of Transition Towards Cleaner Energy?

• Risks of Stranded Assets:
  • Stranded assets are at risk of losing value and becoming liabilities due to unforeseen shifts in market conditions, regulatory changes, evolving consumer preferences, and technological advancements.
    • Stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities.
  • This poses potential risks to banks and financial institutions that have direct or indirect ties to the fossil fuel sector.
• Financial Implications:
  • The financial risk associated with decommissioning coal plants in India is relatively high due to the average age of these plants being only 13 years.
  • Public sector banks and Non-Banking Financial Institutions (NBFCs), bear a substantial 90% of the loan burden associated with coal projects.
    • Moreover, private banks have reduced their financing to coal-fired thermal power plants significantly.
• Regional Vulnerabilities:
  • Regions like Chhattisgarh, Odisha, and Jharkhand have a high share of stressed assets (to the tune of 58%,55% and 27%) in state coal power capacities.
    • This places them at a heightened risk of facing financial losses due to asset devaluation as India moves towards sustainable energy practices.

Way Forward

• Governments need to create robust policies and regulations that provide clarity and predictability for investors transitioning away from coal. Clear guidelines and supportive policies can incentivize the shift towards renewable energy sources while mitigating risks for stakeholders.
• Conducting thorough risk assessments, including stress testing and scenario planning, can help financial institutions and Investors anticipate potential impacts of stranded assets. This proactive approach allows for better risk management and mitigation strategies.
• Financial institutions should diversify their investment portfolios by gradually reallocating funds from fossil fuel-dependent assets to renewable energy projects. This step can help minimize the risks associated with stranded assets and align with global sustainability objectives.