The Changing Economics of Coal

Case Study: Tata Mundra

Justin Guay, World Bank Annual Meetings September 21st , 2011

- Structural Drivers of Rising Coal Prices: oil prices, demand, and supply constraints

- Coal Price Behaviour in Key Markets: Surging and volatile

-The Fallout: Economically unviable power plants (Tata Mundra, Krishnapatnam)

Overview

- Emerging Market Demand

- Supply constraints

- Oil Prices

Why Coal Prices Are Rising

Source: IEA Coal Statistics 2011

0

20

40

60

80

100

120

140

160

China India Korea

% G

row

th in

Dem

and

Coal Consumption Growth 2000-2009

Strong Coal Demand in Emerging Asian Markets

Stagnating Coal Production

Source: Heinberg and Fridley, Nature 2010 Source: IEA World Energy Outlook 2010

Spot Prices During 2008 Oil Price Shocks

Source: US EIA

The Price of Coal is Volatile

- In Key markets the price of coal rose saw 13% CAGR over the past decade

- Chinese prices rose 15% CAGR

- Export prices doubled from 2006-2011

Coal Prices Are Rising in all Major Markets

Coal is Expensive

The Price of Coal rose at a 13% CAGR 2001-2008

Source: EIA http://www.eia.gov/emeu/international/stmforelec.html

15

35

55

75

95

115

135

155

Ave

rage

Pric

e/To

n U

SD

India USA Chinese Taipei Poland Germany

Selected Steam Coal Prices 2001-2008

Average CAGR13%

Chinese Coal Prices

The Price of Coal rose at a ~ 15% CAGR from 2001-2008

Newcastle Benchmark Coal Prices 2006-2011

Internationally Traded Coal Doubled in Price from 2006-20011

Coal Production in Asian Marine Markets

A 25% shortfall Provides Enormous Rent Seeking Opportunities

- Indian Import Vulnerability

- Tata Electricity Impacts

- Unviable Coastal Coal Plants

The Fallout

Indian Vulnerability to Import Price Surges

Source: Government of India Planning Commission

Source: EIA http://www.eia.gov/emeu/international/stmforelec.html

1015

20253035

404550

5560

Ave

rage

Pric

e/To

n U

SD

Indian Steam Coal Prices 2001-2011

CAGR4%

Imported Coal Cost Premium

CAGR35%

Indian Vulnerability to Import Price Surges

Tata Plant Economics

0

1

2

3

4

5

6

7

8

9

10

$30/ton $60/ton $120/ton

$cen

ts/k

wh

Coal Price Impact on Electricity Prices

20-60% Rise in Electricity Prices

O&M

Fuel Costs

Unviable Coastal Coal Plants

4 GW Tata Mundra UMPP: - Faces losses of 270% - Forced to double rates charged to consumers - Even with requested price revision project unviable for at least the next five years. - Tata CEO on whether Mundra is viable at the moment:

“No. At this moment, we have tremendous impact due to imported coal on Mundra because the price of coal has increased multi-fold….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.”

4 GW Krishnapatnam UMPP: Construction halted immediately after Indonesian price revision.

$30 billion exposure to coal projects for Indian Banking Industry. Of this - 14 GW of projects face imported coal risk

Thank you

Justin Guay, World Bank Annual Meetings September 21st , 2011