ANALYSIS: Increased scrutiny on coal-fired plant funding may not deter Asia Pacific demand

A close check on international funding for new thermal coal power projects globally so that countries meet their carbon emission targets is unlikely to jeopardize demand from developing Asia Pacific countries, market sources told S&P Global Commodity Insights in the week to July 7.

Japan said in June that it will not provide loans for the development of large thermal coal-based power plants in Indonesia and Bangladesh.

The impact, market sources said, can be seen across nations that have announced either cancellation of planned projects or have put them on hold.

Recently, Indonesia's state-owned electricity company PLN said it has axed its 1 GW project to develop a coal-fired power plant. Bangladesh also put a 1.2 GW coal project on back burner.

The decision is seen as a follow up of a commitment made in 2021 by the UK, Canada, France, Germany, Italy, Japan, and the US along with the EU to end aid for coal-fired power plants that are not meeting requirements for reducing emissions.

However, this raised questions among market participants about reliance on coal as an energy source on a durable basis, with traders saying that unless a cheaper form of energy source is available, coal may continue to dominate in the energy mix for developing countries.

"What is being canceled is small compared to what is being built. We are seeing currently what is happening around the world after the Russia Ukraine. Unless there is an economically viable alternative to coal power, I don't think any developing country will abandon it," an Indonesia-based trader said.

India also plans to reduce power produced from its 81 coal-based plants by 2026, S&P Global reported in May. The plan includes replacing nearly 58 billion kWh power produced by coal fired power plants through renewable energy sources. However, the country plans to add coal-fired capacity of 7 GW in the fiscal year 2022-23 (April-March), according to a status report by the country's federal power ministry in June.

In September 2021, China said it will shut overseas coal projects to cut greenhouse emissions. It shelved 15 overseas coal-fired power plants of cumulative capacity of 12.8 GW in April 2022, while other plants of 37 GW capacity were vulnerable to being shut down. These projects were concentrated in Vietnam, Bangladesh, and Turkey.

The development on coal-fired power plants also bears semblance to the investments into coal production capacity, with producers complaining of reduced financing available to increase capacity amid global scrutiny on coal production.

"I think it has more got to do with funding dry up and renewable is very competitive in term of tariff pricing. China has been funding most of those developing countries' projects," a Singapore-based trader said. "I guess the question is without cheap and reliable power output, how are these countries going to grow their manufacturing/economic growth."

Sustaining demand

Nations in Southeast Asia, excluding India, are expected to sustain imports of over 150 million mt thermal coal in 2022-24, according to the Resources and Energy Quarterly report by the Australia's Office of the Chief Economist.

"Plans for coal plant constructions across the region have been wound back, but a sizeable pipeline remains under construction," the report noted. "There is little sign that the fallout from the Russian invasion of Ukraine will change supply chains across the region, with countries showing little interest in trade or sanction policies targeting Russia."

India's coal ministry projections on coal imports also show that India will import around 95 million mt non-coking coal in FY 2029-2030 as against its projection of 130 million mt in FY 2022-23.

While many funding countries have increased their probe over funding, market sources said some developing countries have themselves stopped borrowing funds for the project as part of their efforts to reach their carbon neutral goal.

Higher input costs

In 2022, Australia announced shutting down power plants in the state of West Australia as it believes that keeping coal-based power production was more expensive than greener alternatives.

The Newcastle 5,500 kcal/kg NAR coal with 23% ash was assessed at $183/mt FOB on July 6, sharply up from $103.5/mt at the start of 2022, according to S&P Global data.

Market participants in India have also complained about the cost of importing coal from Indonesia as many state-level electricity producers are not able to pass on the costs to consumers.

Indonesia is India's largest supplier of thermal coal. The 5,000 kcal/kg GAR coal price was assessed at $154.3/mt CFR India West on July 6, compared with an average $60.40/mt in 2019, S&P Global data showed.