The Power Finance Corporation (PFC), the largest lender to the power sector, with a market share of 20 per cent, has been lending to marquee power projects and facilitating government schemes, including the latest Rs 3.04 trillion Revamped Distribution Sector Scheme. In an interview with Power Line, R.S. Dhillon, chairman and managing director, PFC, discusses the sector’s achievements, the evolution of the financing landscape in the past 25 years as well as his outlook for the sector…
What have been the power sector’s biggest achievements over the past 25 years?
India’s per capita electricity consumption was around 400 units in the mid-1990s. Today, it is around 1,200 units, a growth of three times over the past 25 years. Our installed capacity has quadrupled during the period to reach 380 GW. The period also saw the enactment of the Electricity Act, 2003, and various Government of India (GoI) schemes such as the Accelerated Generation and Supply Programme, Accelerated Power Development and Reforms Programme, Integrated Power Development Scheme, Deendayal Upadhyaya Gram Jyoti Yojana, National Solar Mission and Saubhagya. As a result of these reform measures, we have achieved the following milestones:
- Electrification of 100 per cent households by building the distribution network across the nation
- India has turned power surplus, from peak deficit levels of over 20 per cent
- Implementation of “One Nation, One Grid, One Frequency” for seamless interregional transfer of power
- Vast improvements in the quality and reliability of power
- Installed renewable energy capacity has crossed 100 GW
- Significant reduction in aggregate technical and commercial (AT&C) losses
How has the financing landscape in the sector changed during this time?
The financing of the power sector has become more competitive and challenging over the years. Earlier, all the power utilities were government owned and loans extended to them had a higher safety owing to their quasi-sovereign nature. The opening up of the sector to private investments and the introduction of the Tariff Policy in 2006 paved the way for competitive procurement of power. This, coupled with the easing of the long-prevailing power-deficit scenario, saw the moderation of margins for power generating companies, leading to an increase in risk perception from the financing viewpoint.
In the 2010s, we had issues regarding coal supply to thermal projects, which resulted in a spike in non-performing assets. The decade also witnessed the enactment of the Insolvency and Bankruptcy Code (IBC), which was a landmark for the financing industry. Under the IBC, the lenders now have a framework for time-bound resolution of stressed assets.
The rapid proliferation of renewable energy projects has thrown up its own set of financing challenges. Owing to their short gestation periods, lenders have to be very quick in appraising and disbursing to these projects. The tariffs are low due to fierce competition in bidding. Thus, lenders have to offer finer rates to improve project viability. Lenders also have to be abreast of the latest technological developments in the renewable energy sector as newer and more efficient technologies are being introduced continuously.
“PFC is exploring lending opportunities in emerging fields such as e-mobility, EV manufacturing and EV infrastructure.”
What are some of the unresolved financing challenges that continue to impede sector growth?
The weak financial position of power distribution companies has been one of the persistent stress points of the Indian power sector. The major reasons for their weak finances are high AT&C losses and under-recovery of costs in tariff. Distribution is a critical segment of the power sector value chain, being the interface with the end-consumer. The financial stress in this segment gets transmitted upstream to transcos and gencos in the form of delayed payments, affecting the financial viability of the entire sector.
The state discoms reneging on signed power purchase agreements is another issue that remains to be addressed. Power project financing being largely non-recourse financing, lenders derive comfort from various contractual arrangements of the projects. Discoms unilaterally terminating contracts or renegotiating tariffs jeopardises the viability of these projects. This also discourages investors from making investments in the sector.
The GoI has taken various measures to address the above issues. In order to strengthen the distribution segment, the government has recently launched a major reform initiative, the reforms-based and results-linked Revamped Distribution Sector Scheme. It aims to improve the operational efficiencies and financial sustainability of discoms by providing reforms-linked financial assistance for strengthening of the supply infrastructure. The scheme, with a total outlay of Rs 3.04 trillion, will be available till the year 2025-26.
The proposed amendments to the Electricity Act, 2003 will delicense power distribution and offer consumers the freedom to choose their power supplier. The act aims to make tariffs cost reflective by reducing cross-subsidies. It would also include provisions for the establishment of an Electricity Contract Enforcement Authority, with powers to enforce the performance of contracts related to the purchase or sale of electricity. These reforms are expected to significantly improve the long-term growth prospects of the power sector.
“The NIP has identified an investment requirement of Rs 21 trillion in the power sector till 2025. In addition, investments of about Rs 17 trillion are required over the next 9-10 years for achieving the 450 GW renewable capacity addition target. This gives us a steady funding pipeline for the coming years.”
What will be the biggest challenge for the sector in the coming years? What is the way forward?
Climate change is the greatest threat faced by humanity today and the energy sector is one of the largest contributors to greenhouse gas emissions. For India, meeting its increasing energy needs without damaging the environment is one of the key challenges. To this end, the government has set an ambitious target of 450 GW of renewable energy capacity by 2030. This would require a strong supply chain and huge financial investments. Due to its variable nature, the addition of such a large quantum of renewable energy would require significant strengthening of the grid system and also integration of energy storage systems.
Storage-based hydro projects are an ideal option for balancing variable generation. However, a large amount of hydro potential still lies unutilised. Tapping this potential with minimal environmental and ecological consequences needs to be explored in the coming years. Our baseload requirement for the foreseeable future would still be catered to by coal-based generation. It is also important to ramp up domestic coal production and secure overseas fuel sources.
What will be PFC’s focus areas in the coming years? What are some of the new opportunities that the company is pursuing?
PFC is the largest lender to Indian power sector, with over 20 per cent market share. We will continue to tap the huge funding opportunities in the clean energy space as well as infrastructure improvement in the transmission and distribution sector. The National Infrastructure Pipeline (NIP) has identified an investment requirement of Rs 21 trillion in the power sector till the year 2025. In addition to this, investments of about Rs 17 trillion are required over the next 9-10 years for achieving the 450 GW renewable capacity addition target. This gives us a steady funding pipeline for the coming years.
PFC and its subsidiary REC are the nodal agencies for the Revamped Distribution Sector Scheme. We will be meeting a major portion of the funding requirement under the scheme for the improvement of distribution infrastructure and pan-Indian roll-out of smart metering. The installation of emission control equipment such as flue gas desulphurisation systems for the existing coal-based plants is another opportunity that we are pursuing.
PFC is also exploring lending opportunities in emerging fields such as e-mobility, electric vehicle (EV) manufacturing and infrastructure for the EV ecosystem. Domestic manufacturing of renewable energy generating equipment and energy storage devices is expected to take off in the coming years, backed by the attractive performance-linked incentive scheme of the GoI. We are looking at capturing funding opportunities in these fields as well.