Tata Power may pull the plug on new coal power, says study

Tata Power, the country’s largest private integrated power producer, is likely to cease building new coal-based generation projects, shifting gears to renewable power sources, a study showed.

A report by the US-based Institute for Energy Economics & Financial Analysis (IEEFA) titled ‘Tata Power: Renewables to Power Growth’ spells out the company’s long-term strategy that will see renewable energy dominate its power capacity build-out going forward.

Presently, thermal power accounts for around 70 per cent of Tata Power’s portfolio. But the current energy mix is part of the company’s long-term legacy before 2013 when renewable energy was pricier compared with competitive coal-fired power.

“The company’s plan, ‘Strategic Intent 2025’ calls for up to 70 per cent of new capacity additions to come from solar, wind and hydro through to 2025. This represents a significant departure from the accepted wisdom of just a few years ago that a major expansion of coal-fired power would be required to serve India’s growing electricity demand”, said Simon Nicholas, energy finance analyst at IEEFA.

Tata Power’s debt laden and stranded power asset at Mundra (Gujarat) is viewed as the trigger for the company to abjure fresh coal-fired capacities.

“The Mundra plant is making consistent, significant losses that are dragging back the company’s overall financial performance. Tata Power’s experience at Mundra has helped convince the company to turn away from new coal-fired power”, Nicolas said.

Tata Power had not responded to Business Standard’s questions sent by mail till the time this report was filed.

Majority of Tata Power’s thermal capacity is now centred on its 4150 Mw Mundra coal-fired power plant - one of the biggest power plants in India - which experienced losses reaching $191 million for the first three-quarters of FY 2019. Losses have accumulated due to higher than expected costs of sourcing imported coal. Though a bailout of the plant is in the works, it will enhance the tariff burden and realise a debt write-down for the creditors. The IEEFA report quoting an estimate by Tata Power’s chief executive officer says the bailout will only halve the losses at Mundra.

Since 2012-13, net thermal capacity addition by Tata Power is only 68 Mw, factoring in the decommissioning of vintage power units. Over the comparable period, the company added solar and wind power capacities in upwards of 2000 Mw. Tata Power acquired Welspun Energy’s renewable portfolio of over 1 GW in 2016. In total, non-thermal power additions consist of 97 per cent of all additions over this period.

Offering an antithesis to the company’s loss making thermal generation business, Tata Power’s renewables operations recorded earnings before interest, depreciation and amortisation (EBITDA) of $249 million in 2017-18, an EBITDA (earnings before interest, taxes, depreciation & amortisation) margin of 89 per cent and representing 13.9 per cent of assets deployed.

Tim Buckley, IEEFA’s director of energy finance studies notes that Tata Power’s shift mirrors the transition underway within the Indian power sector as a whole, driven by least cost renewable energy.

“Peak coal-fired power capacity in India is on the horizon, and growing electricity demand will be served by current coal power capacity and rapidly growing renewable energy capacity. Tata Power encapsulates this rapid transition’, Buckley added.

According to the IEEFA report, the company’s refocusing into clean power technology can be explained by the significant cost reductions of renewable energy technology in India and the financial stress within the India thermal power sector in recent years.