India should revive its stranded thermal power plants, not invest in new ones: IEEFA report

The report highlights that acquisition and revival should be the first step, as adding new or acquired thermal assets will hurt the acquirer's ESG profile

Strategic acquisitions and subsequent revival of stranded thermal power plants will better serve India’s short-term energy security needs than
investing in new ones, a report released by Institute for Energy Economics and Financial Analysis (IEEFA) on June 15 said.

The report, titled 'Cleaning Up the Last Pile of India’s Power Sector Non-Performing Assets', also cautioned that any new investment in thermal power can potentially lead to stranded asset risk, given the clear economic case of renewable energy over thermal power.

An analysis by IEEFA showed that 26 of the 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.

The report stated that financing new thermal plants will expose domestic banks to another set of potential power sector non-performing assets (NPAs) and a higher climate risk on their portfolios.

The report also highlights that acquisition and revival should be the first step, as adding new or acquired thermal assets will hurt the acquirer's environmental, social and governance (ESG) profile.

While the government wants NTPC Ltd, India’s largest power producer, to add 7 gigawatts (GW) of brownfield thermal power capacity, the IEEFA report identifies six plants with a cumulative capacity of 6.1GW that could be taken up for strategic acquisition.

It suggests that NTPC alone in partnership with other government-owned companies like Power Finance Corporation, REC, PFC Projects Limited (PPL) and National Asset Reconstruction Company Limited (NARCL) could take these six stranded plants up.

On May 8, Moneycontrol exclusively reported that India’s plan to add a total of about 41 GW coal-fired power capacity, including 27 GW of under construction projects, are primarily going to be brownfield projects.

Some of the stranded power plants which, according to IEEFA, are ideal for acquiring and revival include Lanco Amarkantak supercritical thermal power plant and KSK Mahanadi subcritical plant in Chattisgarh; Rattan India in Maharashtra; and GVK Goindwal Sahib Supercritical Power Plant in Punjab.

"NTPC aims to install 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 for renewable energy generation will align well with ESG investors and prevent future stranded assets on NTPC’s books,” said Shantanu Srivastava, Sustainable Finance and Climate Risk Lead, South Asia, IEEFA and the author of the report.

He further said NTPC can also explore the burgeoning market for carbon credits trading to further improve returns from repurposed projects.

The report says that funding acquisition and revival of stranded power plants will be good even for the Indian banks, which have been reeling under high NPAs for over a decade. "It will give the banks more headroom to contribute towards achieving India’s ambitious clean energy goals. By partnering with either PPL or NARCL, NTPC can save significantly on upfront investments while adding capacity for India’s immediate energy security needs," read the report.

Srivastava said NTPC can undertake work on providing coal linkages and power purchase agreements (PPAs) where required, while PPL can provide finance for working capital requirements.

"On the other hand, there are examples of asset reconstruction companies acquiring stranded assets using a 15:85 model, wherein it pays 15 percent of the consideration amount upfront and issues security receipts for 85 percent of the consideration amount, payable on recovery of loans," he said

The report suggested if NTPC partners with NARCL, with the 15:85 model and security receipts having a sovereign guarantee, to acquire some of the stranded thermal assets, then NTPC will not have to invest much capital upfront.