Cheap Affordable Coal? Case Study: Tata Mundra Justin Guay, World Bank AGM, 2013

Coal’s ‘Social Contract’ “The project will provide a competitive source of electricity to partly reduce the current power shortages and help meet the growing demand for electricity in the country. Cheap and reliable power from the project will help in improving the competitiveness of Indian manufacturing and services industries which have to often rely on expensive standby diesel generation to fulfill their power needs. Competitively priced power will also improve access to electricity in rural and urban areas of the country while reducing the subsidy burden on state governments. Therefore, the project will have significant impact not only in terms of reducing the prevalent demand supply gap but in reducing the average electricity costs in the country leading to improved access and industrial competitiveness…The project will contribute to enhanced access to electricity through supply of cheap and reliable power.”

Costs have doubled over the five years Construction Costs Are Rising

Geologically Speaking Coal Is Abundant, Economically Speaking Cheap Coal Is not Coal Prices Are Rising

Oil Price Volatility Source: US EIA The Price of Coal is Volatile

Political Risk: Organization of Coal Exporting Countries (OCEC)? “ Indonesia will not change its stance for Tata Power or for any other company…In fact, all the three countries exporting coal have changed rules in recent times. South Africa, Australia and Indonesia are in sync as far as exporting coal is concerned.” – Tata Power CEO

Indian Vulnerability to Import Price Surges Source: Government of India Planning Commission

Source: EIA Indian Steam Coal Prices CAGR 4% Imported Coal Cost Premium CAGR 35% Indian Vulnerability to Import Price Surges

Tata Mundra’s Cheap and Reliable Power Tata Will Need to Double Rates, and Continue to Slowly Increase Them to Cover the Increasing Costs of Coal Fired Power CAGR 10.81%

Recommendations: Account for Risk Assume rising coal prices: Financial institutions should assume that domestic coal costs will rise to international coal prices over the next 10 years and that international coal costs will increase at the rate of at least 6 percent per year (or two percent more than the rate of inflation, whichever is greater) for the life of the plant. Assume accurate discount rates: For purposes of internal evaluation financial institutions should use a discount rate equal to its proposed lending rate for the project, not a discount rate based on the cost of capital of the proponent of the project. Establish a risk premium: Financial institutions should review data concerning the variability of the factors listed above in the host country and establish a “risk premium” to monetize the risk of project failure for fossil-fueled projects in comparison to alternatives including energy efficiency and clean energy projects.

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