Power Finance Corporation (PFC) continues to fund non-performing assets in the thermal coal sector, some of which are obsolete and economically unsustainable projects that run the risk of becoming stranded assets in the future.
“When India’s government-owned PFC acquired the REC (Rural Electrification Corporation), it formed the country’s largest non-banking finance company (NBFC) and a critically important lender for India’s power sector, with a total asset book approaching $100 billion as of last December (2020),” said Kashish Shah, energy finance analyst with US-based think tank Institute for Energy Economics & Financial Analysis (IEEFA).
PFC and REC have lent a great deal to coal-fired power projects, with Rs 3.43 trillion ($49 billion) or 54% of their total loan books exposed to thermal power.
This loan, in turn, accumulated a large list of non-performing assets on their balance sheets, amounting to approximately Rs 47,454 crore ($6.8 billion) as of December 2019.
“But IEEFA views the extent of their stranded asset risk significantly higher than this as India’s thermal power generation sector continues to trouble the country’s banks, accounting for $40-60 billion in stranded assets. And with India’s thermal power generation sector under severe stress from carrying those $40-60 billion of non-performing assets (NPAs), financing from private banking institutions to the sector has dried up,” Shah added.
Transcripts from the 2017-18 PFC investor meetings show that PFC has granted refinancing loans to NTPC's Meja plant (1,320 Mw) of Rs 3,700 crore ($500 million) and Raichur Yermarus Power project (1,600 Mw) of Rs 1,700 crore ($260 million), Karnataka Power Corporation Ltd (KPCL) and BHEL.
Four new projects with a total capacity of 8.8 Gw began construction in the country in 2019, all of which received funding from PFC and REC. As PFC is the lender of last resort for new coal-fired power, all of these projects received support from PFC and REC, underlining key developments in India – private sector loans for coal-fired project proposals have decreased to negligible levels, according to the IEEFA report.
“IEEFA views PFC’s lending to new existing or new thermal power developments as extremely risky in light of the expected tariffs on these projects being 60-70 per cent above the prevailing renewable energy tariffs of Rs 2.50-2.80 per kilowatt hour (kWh). IEEFA questions how PFC can expect to get a viable total project return over the 40-year life of thermal power plants given the uncompetitive tariffs these projects require, particularly in light of rising financial distress at distribution companies (discoms) which are demanding an ever-lower cost of procuring new power generation,” said Shah.
On the positive side, PFC and REC jointly lent Rs 33.759 ($4.8 billion) to renewable projects as of December 2019, with some 5% of the loans outstanding. Given India 's massive renewable target of 450 Gw by 2029-30, and the associated funding requirements for the expansion and modernisation of the national grid system, IEEFA estimates $500-700 billion of new investment is needed.
This will also require work by smaller regional developers, which provides a significant opportunity for a rapid increase in funding from PFC and REC.
