Global post-Covid stimuli bank on coal and power

Sumit Maitra

As economies emerge from lockdowns, nations across the globe have been formulating economic stimulus packages to revive demand, promote industrial activities and trigger trickle down process across various strata of their individual economies.

India, with 350 billion tons of a resource, which is world’s third largest reserve, has focused on coal extraction and mining infrastructure and processes, while announcing its own stimulus package.

It’s not just India. Major energy producing nations like, China, Indonesia and also United States to some extent, are now banking on coal and power sectors to stage a recovery to shrug off months of inactivity.

The thrust on the energy sector to spearhead global economic revival comes at a time when planned investments, particularly by the private sector, in the fuel production capacities are being slashed under pressure from the collapse in demand and prices.

And reluctance to commit fresh capital to new projects could leave cash-constrained governments and companies using existing assets for longer, delaying the speed with which newer technologies are introduced into the system.

“This raises the spectre of an energy system characterised by systematic underinvestment in new technologies and overreliance, instead, on its existing capital stock,” International Energy Agency said.

“Covid-19 is a huge shock to the energy system, but the response also presents an opportunity to steer the energy sector onto a more resilient, secure and sustainable path,” IEA said in its World Energy Investment 2020 report.

Renewable Energy no more cheap

Falling back on fossil-fuel based electric power plants to trigger economic activity comes at a time when the competing Renewable Energy sector has been exposed to be vulnerable to upheavals in a single geography with supply disruptions in China putting an end to the emerging narrative of RE power in India turning much cheaper than coal-fired energy.

Acme Solar, the fastest growing solar power producer in India has just cancelled its contract with the government to supply energy at the lowest tariff of `2.44 invoking the force majeure clause on account of project delays and uncertainty over the current pandemic as imports from China.

“Although investments in coal power are down in many parts of the world, global approvals of new plants in the first quarter of 2020 mainly in China were at twice the rate seen in 2019, and there is a long pipeline of projects under construction,” IEA said.

China’s stimulus package

China has now stepped up fiscal efforts to support its coronavirus-ravaged economy after giving a big push to setting up coal-fired power plants.

China’s National Development and Reform Commission recently announced plans to boost investment in traditional infrastructure projects such as railways and energy efficient ultra-high voltage (UHV) power transmission lines as part of a larger economy wide stimulus package that would see raising $140 billion through issuance of treasury bills and $526 billion in local government bonds.

This follows an earlier package announced in March to set up five thermal power plants with a combined capacity of 7.96 gigawatts.

Public utility, State Grid of China, which accounts for around a third of the electricity investments, announced investments for a total of Yuan 450 billion in 2020 or about $65 billion), with ultra-high voltage (UHV) projects accounting for 40 percent of total investment. Additional signs of investment expected to increase in some sectors including pumped hydro storage and coal-fired generation.

Research house CRU sees this is as a “good stimulus package” which can put China’s GDP growth rate in 2020 in 2-3 percentage bracket. “The focus on infrastructure spending this year is good news for commodities markets,” said Yingrui Wang, CRU’s economist, said.

“Covid-19 is a huge shock to the energy system, but the response also presents an opportunity to steer the energy sector onto a more resilient, secure and sustainable path.”

International Energy Agency

US strategy

While US’ stimulus bills passed so far do not include specific support for the energy sector, fossil fuel companies including oil, gas and coal are likely to benefit from the $750 billion bond buyback programme.

US companies having a BBB-/Baa3 or higher credit rating from a major credit rating agency as of March 22 would be eligible for the Federal Reserve’s corporate bondbuying programs created as part of the US government’s coronavirus recovery efforts.

According to an analysis by Rainforest Action Network, 90 such bond issuers in the fossil fuel sector and 152 issuers in the utilities sector are eligible under this programme.

There is also loud demand for stimulus for the energy sector including coal in US.

“It is vital that our governmental policy does not place undue stress on an industry that will be fighting to rebound as our economy recovers from the Covid-19 pandemic. Coal is still needed to keep the lights on. Coal is still needed to produce the steel necessary for the wheels of our economy to turn,” Virginia Coal and Energy Alliance Chairman J.P. Richardson said during a webinar.