NPAs in the Indian power sector and strategies for resolving them

The term Non-Performing Assets (NPAs) is almost synonymous with the woes of the Indian banking sector. The Reserve Bank of India’s (RBI) regulations define NPAs as loans or advances in which a borrower has failed to make interest or principal repayments for more than three months (90 days). The banking sector has grappled with significant NPAs since 2008’s global financial crisis. Before the crisis, bank loan disbursals 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/delay in acquiring land and other permits, off-taker risk (lack of power purchase agreements (PPA)) 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 (MoP) had deemed 34 coal-based TPPs with a total capacity of 40.1 gigawatts (GW) “stressed” in March 2018. Combined, these plants had an outstanding debt of Rs1.7 trillion (US$23 billion).

The situation is starkly different today. Huge provisioning of bad loans (close to US$124 billion over the past five years), robust credit demand and low new slippages (new NPAs) have contributed to the banking sector’s best health in years. Net NPAs of Indian scheduled commercial banks are down to around 1.3% in September 2022 from a high of 6.1% in March 2018. The power sector has also largely turned the page on its legacy NPA issues.

The Institute for Energy Economics and Financial Analysis found that 26 out of the aforementioned 34 stressed assets, having an installed capacity of 21.4GW, have been resolved partially or fully as of May 2023. Out of these, 11 were resolved through acquisition by a strategic buyer.

India’s short-term relook at 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 contributors towards providing 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 last year, along with rapidly rising power demand across the country. These factors have led the government to relook at thermal power as a fix against any power crunch in the foreseeable future. According to the recently released National Electricity Plan (NEP), India has an under-construction thermal capacity of 25.5GW that is likely to come online over 2022-2027. Besides having the potential to derail India’s energy transition journey, a higher reliance on coal and gas power also diverts bank financing towards these high carbon-emitting assets, which leads to capital lock-in that could otherwise go to renewable energy assets.

The central government has directed NTPC, the nation’s biggest power producer with its unsaid mandate to provide for the country’s energy security needs, to add a further 7GW of new thermal power units over the coming three years. NTPC also has the most ambitious renewable energy target of 60GW 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 to enhance 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, the 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 time-bound manner and possibly acquire and aggregate the stressed debt from various lenders to the power assets for a resolution.

IEEFA has identified a set of six stressed power sector assets, with a combined capacity of 6.1 gigawatts (GW), currently marked as NPA accounts and fit for acquisition by NTPC in collaboration with PPL and NARCL. NTPC has an 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 600MW Lanco Amarkantak Supercritical Thermal Plant and 1800MW KSK Mahanadi Subcritical Thermal Power Plant in Chhattisgarh, and 1,350MW Rattan India plant in Nashik, Maharashtra. If acquired by NTPC through PPL, all three plants will add 3.7GW 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, in all these plants, PFC-REC are already the lead lenders, hence having the highest voting share in any resolution process.

For NARCL-NTPC, IEEFA identifies three thermal assets having a combined capacity of 2.3GW as good acquisition candidates. These include the 540MW GVK Goindwal Sahib Supercritical Power Plant in Punjab, 1200MW Mutiara Coastal Energen Subcritical Power Plant in Tamil Nadu, and 600MW SKS Power Generation Subcritical Power Plant in Chhattisgarh. NARCL’s business model involves paying 15% of the consideration upfront and issuing security receipts (SRs) for 85%, payable on the recovery of loans. This makes it easier to aggregate assets, preserve their value and drive the resolution process. NARCL will receive Rs306 billion (US$3.8 billion) of sovereign guarantee for security receipts (SRs).

For any asset being resolved under the National Company Law Tribunal (NCLT), the committee of creditors (CoC) of an NPA account would be keen to accept the resolution offer from a partnership of NARCL and NTPC, where one provides sovereign-backed SRs and the other brings in power sector expertise and strong financial backing to restart the project.

Post-acquisition strategy for NTPC

But the acquisition of such assets should be just the first step. IEEFA believes adding thermal assets to NTPC’s new or acquired portfolio will lead to stranded asset risk and harm the company’s environmental, social and governance (ESG) profile. NTPC aims to install 60GW 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. The Italian utility Enel is an example of a power sector utility that has championed the retire and repurpose model for thermal assets. 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 such plants being repurposed globally. Enel is currently targeting the repurposing of 48 sites over the 2022-2024 period. 

NTPC can also explore the burgeoning market for carbon credits trading to further improve returns from repurposed projects. Besides repurposing the site for renewable energy generation, conservation, restoration and land management projects that generate carbon credits are other options with NTPC. 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.

This article was first published in PowerLine.