Is India’s Power Finance Corporation (PFC) funding white elephants? Yes, if the Institute for Energy Economics and Financial Analysis (IEEFA) report is to be believed.
The PFC had given ₹3,43,746 crore ($49billion), or 54% of the total loans, to the thermal power sector, accumulating non-performing assets (NPA) of almost ₹47,454 crore ($6.8 billion) as of December 2020.
“PFC and Rural Electric Corporation Ltd. (REC), the big State-owned institutions charged with financing a large part of India’s growing need for electricity generation, may instead be funding a herd of white elephants — obsolete and economically unviable, coal-fired power plants that could soon become stranded assets,” said the report from the IEEFA.
PFC’s total asset book was approaching $100bn as of last December.
“IEEFA views the extent of the stranded asset risk significantly higher 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 NPAs, financing from private banking institutions to the sector has dried up,” said Kashish Shah, energy finance analyst at IEEFA.
PFC has provided refinancing loans to NTPC’s Meja plant (1,320 MW) of ₹3,700 crore and Raichur Yermarus Power project (1600MW) of ₹1,700 crore (a project of Karnataka Power Corporation Ltd. (KPCL) and BHEL.
According to IEEFA, 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% above the prevailing renewable energy tariffs of ₹2.50-2.80 per unit.
Four new projects with total capacity of 8.8 GW began construction in India in 2019, and all have received funding from PFC and REC.
“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 Mr. Shah.
The report further sheds light on PFC’s asset impairment costs and provisioning cover for its non-performing assets.
PFC and REC both have materially increased their lending to the renewable energy sector, in line with the government’s long-term power sector objectives.
However, in FY2018/19, PFC lent $1.2 billion to renewable energy projects — only capturing less than one-tenth of the market for renewable lending.
“Given the poor market share and the speed of the global energy transition, we recommend that PFC lend more to support renewable capacity growth,” he said.