Repowering Assets: NPAs in the Indian power sector and strategies for resolving them

Shantanu Srivastava, Sustainable Finance and Climate Risk Lead, South Asia, IEEFA

The term non-performing assets (NPAs) is almost synonymous with the woes of the Indian banking sector. Reserve Bank of India (RBI) re­gu­lations define NPAs as loans or advan­ces for which a borrower has failed to make interest or principal repayments for more than three months (90 days). The banking sector has been grappling with significant NPAs since the global financial crisis of 2008. Before the crisis, bank loan disbursals had surged, propelled by India’s high gross domestic product (GDP) growth and rising invest­ment/ GDP ratio.

Power sector: A major contributor to the NPA problem

The Indian power sector has long contributed to the country’s NPA problem. Despite the government’s efforts, the se­ctor still faces significant challenges. The­­se include delays in project imple­me­ntation, inadequate fuel supply tie-ups, difficulty/delays in acquiring land and other permits, offtaker risks such as la­ck of power purchase agreements (PPAs), and cost overruns/non-viability. As a result, banks and financial instit­u­ti­o­ns have accumulated bad debt, im­pa­cting their performance. The vast majority of NPAs come from thermal power projects (TPPs), mostly privately owned. According to the 37th Parliamentary Standing Committee on Energy, the Mi­ni­stry of Power had deemed 34 coal-based TPPs with a total capacity of 40.1 GW “stressed” in March 2018. Combin­ed, these plants had an outstanding debt of Rs1.7 trillion ($23 billion).

The situation is starkly different today. The huge provisioning of bad loans (clo­se to $124 billion over the past five yea­rs), robust credit demand and the low amount of new slippages (new NPAs) have contributed to the best health that the banking sector has enjoyed in years. Net NPAs of Indian scheduled commercial banks are down to around 1.3 per cent as of September 2022 from a high of 6.1 per cent in March 2018. The po­wer sector has also largely turned the page on its legacy NPA issues. Analysis done by the Institute for Energy Econo­mics and Fi­­nancial Analysis (IEEFA) shows that 26 out of the aforementio­n­ed 34 st­ressed assets, with an installed capacity of 21.4 GW, have been resolved partially or fully as of May 2023. Out of these, 11 were re­so­lved via acquisition by a strategic buyer.

India’s short-term reassessment of thermal power

The power sector has been growing dy­na­mically over the last couple of ye­ars, with India steadily moving towar­ds ac­hieving its 2030 renewable energy targ­ets. Given the country’s massive clean energy ambitions, renewable energy will lead the next leg of financing in India’s power sector. Global and domestic ba­nking institutions are already the largest providers of debt for under-construction renewable energy projects in India, a trend set to accelerate going forward.

However, the sector has faced several headwinds over the past year, along with rapidly rising power demand from across the country. These factors have led the government to take another look at thermal power as a solution to any power crunch in the foreseeable future. Accor­ding to the recently released Na­tional Electricity Plan, India has an un­der-con­struction thermal capacity of 25.5 GW, which is likely to come online during 2022-27. Besides having the potential to derail India’s energy transition journey, greater reliance on coal and gas power also diverts bank financing towards these high carbon-emitting assets, which leads to a locking of capital that could otherwise go to renewable energy assets.

The central government has directed NTPC, the nation’s biggest power produ­cer with an unsaid mandate to provide for the country’s energy security needs, to add a further 7 GW of thermal power units over the coming three years. NTPC also has the ambitious renewable energy target of 60 GW of installed capacity by 2030, the highest among all domestic power producers.

Resolving the remaining power sector NPAs

As previously mentioned, the successful resolution of power sector NPAs has primarily occurred through strategic acquisitions by other sectoral companies. Of­ten, there are arguments that low acquisition ratios and, consequently, higher haircuts have prevented banks from re­moving stressed assets from their balance sheets. Strategic acquisitions have been successful, as they result in higher bids and lower haircuts for lenders, gi­ven the higher value of underlying assets for strategic buyers.

With India’s recent announcement of enhancing its thermal fleet in light of en­ergy security concerns, the resolution of the stranded capacity already present can be a viable alternative. Firstly, it will help prevent scarce capital from flowing into building new thermal assets. Se­condly, it will help avoid the buildup of credit and climate risks within the banking system. Lastly, commissioning a new brownfield thermal asset in India takes around two years, so any new plans will face offtake difficulties if power sector dynamics change significantly during that time.

The newly formed Power Finance Cor­poration (PFC)-REC joint venture, PFC Projects Limited (PPL), and India’s bad ba­nk, National Asset Reconstruction Company Limited (NARCL), can make these acquisitions through partnerships. PFC and REC formed PPL to acquire stre­ssed power assets and bring in stra­tegic investors to operate, maintain and complete them wherever required. On the other hand, the Indian government set up NARCL to resolve the banking sector’s overall stressed assets in a timebound manner, and possibly acquire and aggregate the stressed debt from va­rious len­ders to power assets for resolution.

IEEFA has identified a set of six stressed power sector assets, with a combined capacity of 6.1 GW, that are currently marked as NPA accounts and are fit for ac­quisition by NTPC in collaboration with PPL and NARCL. NTPC has the op­portunity to acquire these stressed as­sets and provide for the short-term po­wer needs of the nation.

Strategic acquisition of stressed assets through PPL and NARCL

Potential acquisition targets for PPL-NTPC include the 600 MW Lanco Amar­kantak supercritical thermal plant and the 1800 MW KSK Mahanadi subcritical thermal power plant in Chhattisgarh, and the 1,350 MW Rattan India plant in Nashik, Maharashtra. If acquired by NTPC through PPL, the three plants will add a combined 3.7 GW to NTPC’s thermal fleet, essentially lowering the buil­dup of new thermal assets by an equivalent amount. For the three assets, NTPC can undertake work on providing coal linkages and PPAs where required, while PPL can provide finance for working capital requirements. Additionally, for all of these plants, PFC-REC are already the lead lenders, and thus have the highest voting share in any resolution process.

For NARCL-NTPC, IEEFA has identified three thermal assets with a combined capacity of 2.3 GW as good acquisition candidates. These include the 540 MW GVK Goindwal Sahib supercritical po­wer plant in Punjab, the 1,200 MW Muti­ara Coastal Energen subcritical power plant in Tamil Nadu, and the 600 MW SKS Power Generation subcritical power plant in Chhattisgarh. NARCL’s business model involves paying 15 per cent of the consideration upfront, and issuing security receipts for the remaining 85 per cent, payable on the recovery of loans. This makes it easier to aggregate assets, preserve their value and drive the resolution process. NARCL will receive Rs 306 billion ($3.8 billion) in sovereign guarantees for security receipts. For any asset being resolved under the National Company Law Tribunal, the committee of creditors of an NPA account would be keen to accept a resolution offer from a partnership of NARCL and NTPC, where one provides sovereign-backed security receipts and the other brings in power sector expertise and strong financial backing to restart the project.

Post-acquisition strategy for NTPC

The acquisition of such assets should be just the first step. IEEFA believes that adding thermal assets to NTPC’s new or acquired portfolio will lead to stranded asset risks and harm the company’s environmental, social and governance (ESG) profile. NTPC has a target of installing 60 GW of renewable energy capacity by 2030, which would require securing capital from global ESG inves­tors. Hence, a post-acquisition strategy to retire and repurpose acquired stress­ed thermal assets will align well with ESG investors and prevent future stran­ded non-renewable energy assets on NTPC’s books. An example of a power se­ctor utility that has championed the retire and repurpose model for thermal assets is the Italian utility Enel. The co­m­pany, one of the largest power sector conglomerates glo­bally, runs a Future-e project aiming to retire and repurpose old thermal power assets. Its Teruel power plant in Spain is one of the big­g­est among such plants being repurpo­sed globally. Enel is currently targeting the repurposing of 48 sites over the 2022-24 period.

NTPC can also explore the burgeoning market for carbon credit trading to further improve returns from repurposed projects. Besides repurposing a site for renewable energy generation, conser­vati­on, restoration and land mana­ge­me­nt projects that generate carbon credits are other options for NTPC to investigate. This will further support the case for re­pu­­rposing through higher project returns.

India is expected to be the fastest growing large economy in the coming de­cades. An exponential rise in power de­mand will accompany this unprecedented growth. Installing renewable energy instead of fossil fuels to feed the growing power needs presents India with a significant opportunity to pursue a low-carbon growth trajectory. The current set of unresolved power sector assets provides an opportunity to avoid investing scarce capital into new thermal assets and prevent the buildup of any risks for the banks.