IEEFA Report : India’s stranded asset risk in thermal power sector underestimated

National News 1

India
should cancel many of the worst thermal power plant proposals

New Delhi, December 18, 2019 : Several more thermal power stations in India could potentially be classified as stranded assets, finds a new report released today by the Institute for Energy Economics and Financial Analysis (IEEFA).

IEEFA’s
report – Seriously Stressed and Stranded: The Burden of Non-Performing Assets
in India’s Thermal Power Sector – finds India’s Parliamentary Standing
Committee on Energy’s 2018 list of stranded assets in the thermal power sector
could have underestimated the true number of stranded assets in India.

IEEFA
reviewed 12 non-performing or stranded assets in India’s thermal coal-fired
generation sector. Some were previously identified by the government, and
others are unable to operate at a competitive price sufficient to deliver a
viable return to investors and are equally deteriorating shareholder’s value as
formally identified non-performing assets. Also, there are projects which have
been on the drawing board for over a decade and most likely will never be
constructed.

Tim Buckley,
lead author of the report and director of energy finance studies with IEEFA,
says stranded assets in the Indian thermal sector are not limited to the 34
projects highlighted by the Standing Committee on NPAs.

“THE
ISSUE IS DEEPER, AND THE FUTURE PIPELINE FACES SIMILAR RISKS,” says Buckley.

“Each of the
12 non-performing assets we reviewed had questionable economics behind their
investment proposals, particularly as lower cost renewable alternatives can be
built in a third of the time and at 30% or lower cost to Indian electricity
consumers.”

According to
the Reserve Bank of India circular, dated 12th February 2018, bankers were
required to refer all loan accounts defaulting payments over 180 days and
holding over Rs2,000 crore (US$280m) in loans to the National Company Law
Tribunal. Previously, lenders and asset owners were given 270 days to resolve
non-payment of dues under a debt restructuring program.

In April
2019, the Supreme Court of India quashed the Reserve Bank’s 12th February
circular on project owners’ appeal, and also ruled to invalidate all actions
taken since its inception. This left the Indian financial sector hostage to
open-ended promotor delays and gaming of the system, and prevented the speedy
resolution of decade-old poor investment decisions.

“As a
result, the banking system remains hamstrung, stymying India’s enormous
economic growth potential” states IEEFA’s report.

The US$40-60
billion of non-performing or stranded Indian thermal power assets, which is
placing stress on a troubled banking sector, is undermining the flow of capital
critical to sustain strong Indian economic growth and a renewable energy
future.

“STRANDED
ASSETS IN THE THERMAL POWER SECTOR ARE ACCUMULATING UNFUNDED INTEREST EXPENSES
that are unlikely to ever be paid,” says Buckley.

“Significantly,
they’re also hampering the bank’s ability to invest in clean new renewable
energy projects to meet both India’s electricity demand needs and the country’s
ambitious world-leading renewable energy targets.

“While
sinking in debt, the banks are unable to extend the necessary flow of capital
critical to sustained, strong economic growth in India.”

IEEFA found
power distribution companies –discoms- are also struggling under massive debt
to the industry. There is currently upwards of US$100 billion of non-performing
or stranded assets shared between discoms and the thermal coal- and gas-fired
power plant sectors.

“Although
there have been a number of initiatives by government and the Reserve Bank of
India to resolve the massive financial distress at many coal- and gas-fired
power plants across India, the problems remain unresolved,” says Buckley.

“INDIA
SHOULD FOCUS ON COST EFFECTIVE SOLUTIONS TO SOLVE THE FINANCIAL STRESS in the
power sector.

“Instead of
building uncompetitive and expensive coal-based thermal power plants,
investments should be made in wind and solar-based power systems as well as flexible
gas-based peaker plants.”

New 25-year,
zero indexation, renewable energy power purchase agreements are consistently
being signed at Rs2.60-3.00/kWh, some 20-30% below the first year cost of
existing coal-fired power plants in India.

“Operators
are finding that coal is less cost-competitive,” says Buckley.

“India
should cancel many of the worst thermal power plant proposals.”

List of
12 power plants reviewed:

·       Amarkantak Thermal Power Plant – Stranded due to the company
over-expanding in too many directions and the poor financial health of discoms
affecting the company. Highlights the need for an effective bankruptcy process.

·       Buxar Thermal Power Station – Stranded due to promoter
inexperience in thermal power, the high cost of new emissions-compliant coal
plants, and the inability to find lenders whilst the banks are weighed down
with non-performing assets.

·       Cheyyur Ultra Mega Power Plant – Stranded due to a lack of interest
in Ultra Mega Power Project construction, and concern over the cost of imported
coal. Now undercut by lower cost, deflationary renewables.

·       Godda Thermal Power Plant – On the brink of being stranded,
propped up by multiple government favours (e.g. tax free zones) and subsidies.

·       Gulbarga Thermal Power Station – Stranded due to Karnataka’s lack
of in-state coal-mining capacity and the company’s failure to deliver
coal-fired power projects.

·       GVK’s Gas-fired Power and Coal-fired
Power Plants

Stranded as the company over-expanded in too many directions, and due to coal
and gas supply issues. Highlights the need for an effective bankruptcy process.

·       Khurja Thermal Power Plant – Stranded due to the lengthy coal
freight distance resulting in high tariffs, overcapacity risk, and promotor
inexperience in thermal power. This plant will be unable to compete with cheap
renewables.

·       Koradi Thermal Power Station – Stranded due to lengthy coal freight
distances as well as existing spare capacity already in Maharashtra. Serious
air pollution issues have also hurt this project.

·       Korba West Thermal Power Plant – Stranded due to technical issues and
the lack of PPAs. Highlights the need for an effective bankruptcy process.

·       Prayagraj Thermal Power Plant – Stranded due to low coal supply, a
lack of working capital, and cost overruns, while subsequent operational issues
occurred as a result of the low plant load factor.

·       Sinnar Thermal Power Plant – Stranded due to outdated technology,
no PPA, and land acquisition issues resulting in the absence of a rail link.

·       Tata Mundra Thermal Power Plant – An operating plant with an over-aggressive tariff bid now impacted by higher-than-expected imported coal prices.

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