The world's largest coal producer will see more than Rs 41,000 crore of its cash flow at risk if it fails to diversify revenue sources with India continuing to ramp up climate ambitions.
The company faces significant financial risk by 2050 as national coal production falls and clean energy adoption gathers pace, said a new study by the International Institute of Sustainable Development. "In the absence of firm government targets on coal peaking and phase-down, the exact pace of change is unknown, which also creates risk."
IISD analysed two scenarios—one where business goes on as usual based on existing plans, and another which is more ambitious and corresponds to reaching net-zero earlier than planned.
It said the business-as-usual scenario in reality is quite unlikely as countries, including India, are expected to raise their ambition under the 2015 Paris Agreement. The impact on cash flows is calculated in the scenario where India moves from business-as-usual to more aspirational commitments.
Coal India is heavily dependent on mining for its business, with 87% of its FY20 revenue coming from net coal sales. It also accounted for 78% of India's coal production that year, highlighting how its fortunes will be intertwined with the country's coal phase-out. India so far has not set any targets for phasing out coal.
Under a business-as-usual scenario, free cash flow is expected to gradually increase and peak around FY2036 before declining back to FY2024 levels by 2050. In the aspirational scenario, where coal usage peak happens a decade early, free cash flows will decline by a sharper 21% by FY2031 from its peak in FY2024.
IISD said the total cash flow at risk over the long term is Rs 41,500 crore. That corresponds to a 28% reduction in net present between the business-as-usual and aspirational scenarios. It has assumed a 12% discount to account for changes in cost of finance.
"The period in which cash flow at risk accumulates most rapidly is the medium term, from 2030–2040, when CFaR rises in by 2.6 times," it said. "This indicates a need for risk mitigation strategies that have achieved scale by the medium term."
The study identified three key diversification strategies for Coal India to help mitigate this risk—setting up grid scale solar projects, developing integrated solar component manufacturing and planned reduction of inefficient coal assets.
As of now, Coal India has stated its ambition to build 3 gigawatt of grid scale solar by 2024. It would be about 4.14% of India's estimated solar capacity that year.
IISD said if Coal India can maintain this share under both scenarios then it can expect the solar business to have positive free cash flows in the short term, despite the initial capital-intensive investment. That means by FY2034, the cash flow at risk from the solar business would turn negative. As a result, by 2050, it would offset Coal India's overall cash flow at risk by Rs 9,400 crore.
Adopting this mitigation strategy means that its long-term cash flow at risk would drop from 28% to 19%.
"In reality, adopting just one strategy to mitigate risk is unlikely, but articulating why ambition is sufficient to offset risk would be a good evidence-based approach to setting the right level of ambition across a range of targets," the report said.
IISD has recommended that the Ministry of Coal provide Coal India with a mandate to assess coal-related risks and take stock of assets that are under threat of stranding.
It said internally Coal India should increase its clean energy ambitions to be in line with the business risks. "As exemplified in this preliminary analysis, increasing SPV targets by 4.4 times could completely offset all coal-related risks based on current national aspirations."
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