- India’s largest power producer, NTPC, plans to expand its coal-based power plants to meet India’s energy requirements.
- Instead of building new plants, NTPC should strategically acquire stranded thermal power plants, where operations have stalled, recommends a recent report by the Institute for Energy Economics and Financial Analysis.
- A higher reliance on coal and gas power also diverts bank financing towards high carbon-emitting assets and capital, that could otherwise go to renewable energy assets, is locked-in.
Instead of building new coal-based thermal power plants, NTPC should acquire stranded thermal plants that will meet India’s short-term energy security needs and will improve the balance sheet of lenders, primarily public sector banks, according to a report by Institute for Energy Economics and Financial Analysis (IEEFA) which works on researching energy markets.
Based on instructions from a government order issued in 2022, NTPC, India’s largest electricity generation company, plans to expand its thermal power capacity to 7 GW to meet the country’s growing energy requirement.
The IEEFA analysis, released on June 15, however, recommends that instead of building new thermal power plants (TPPs), India’s largest power producer should acquire stressed power plants and it has identified six such assets. These six have a combined capacity of 6.1 gigawatts (GW) that will serve multiple purposes – meeting the short-term energy needs of the country, avoiding the risk of creating infrastructure that carries stranded risks and strengthening NTPC’s brand value in the green sector.
The author of the analysis, Shantanu Srivastava, who leads the sustainable finance and climate risk work at IEEFA South Asia, says that NTPC can acquire these thermal power plants at a significantly lower-than-market price from banks. All these six plants are already constructed and this will help skip the gestation period (time from conception of plant to production of power). So, the fixed cost per megawatt (MW) for an acquired TPP will be much less than that for a new TPP.
He told Mongabay-India that acquiring these stranded plants makes more sense because there is stranded asset risk for NTPC by putting more thermal assets in its portfolio. Expanding the thermal fleet does not go well with NTPC’s corporate strategy of pivoting towards renewable energy (RE). It will not sit well with ESG investors that NTPC might target for its green or other sustainable bond issuances or in its RE business Initial Public Offering (IPO) plans. Hence, besides government mandate, acquiring stressed assets also makes business sense for NTPC, he explained.
Stressed assets refer to loans or financial assets that are experiencing difficulty generating income or are at a higher risk of default due to financial or operational challenges. Stranded assets refer to the infrastructure (thermal power plants in this case) which is no longer used or where operations may have stalled and may end up as a liability.
The report lists thermal power plants such as Lanco Amarkantak Supercritical Thermal Plant and KSK Mahanadi Subcritical Thermal Power Plant in Chhattisgarh as well as Rattan India Nashik in Maharashtra, which can potentially be acquired by NTPC. All three TPPs will add 3.7 GW to NTPC’s thermal fleet, if acquired.
Similarly, GVK Goindwal Sahib Supercritical Power Plant, Punjab, Mutiara Coastal Energen Subcritical Power Plant, Tamil Nadu, and SKS Power Generation Subcritical Power Plant, Chhattisgarh, have a combined capacity of 2.3 GW and can be good acquisition candidates given that they are fully developed, the analysis claims.
The current project cost of a supercritical thermal power plant is Rs. 83 million per MW. The IEEFA report says that NTPC can acquire the plants at a lower-than-market value.
In 2018, some 34 coal-based TPPs, with a total capacity of 40.1 GW, were deemed ‘stressed’ with a combined debt of $23 billion, adding to India’s non-performing assets (NPA). An asset becomes non-performing when it ceases to generate income for the bank, defines the Reserve Bank of India (RBI). For the last decade, NPAs have plagued the Indian banking sector when the gross NPA ratio increased in the total assets of banks, especially public sector banks. However, the situation has improved, and the gross NPA ratio has come down to 1.3% in September 2022 from a high of 6.1% in March 2018, says the report.
The IEEFA analysis claims that as of April 2023, 26 of these stressed thermal power plants had been resolved fully or partially, with strategic buyers acquiring 11 of these TPPs. These strategic buyers include JSW Energy, Adani Power, Tata Power, NTPC, Vedanta, and others. A strategic buyer can gain value from integrating the operations of an acquired asset with their operations, Srivastava explains, adding that NTPC is a strategic buyer in this case as it is already operating TPPs and can gain from acquiring and operating these assets.
Responding to Mongabay-India queries, Srivastava says, “The major reason for these plants being stranded is the unavailability of coal linkages, the financial strain of promoter making them unable to provide for the working capital needs and no offtake/PPAs in place. NTPC has the ability to provide on all these three fronts along with PFC Project Ltd (PPL) and the National Asset Reconstruction Company Limited (NARCL). Given its mandate to provide for the short to medium-term power needs of the country, it is expanding coal mining operations. It was asked to operate one of the six plants last year during the acute power shortage period.”
The newly formed Power Finance Corporation (PFC) and REC Limited, both public sector companies, came up with a joint venture called PFC Projects Limited (PPL) to acquire stressed power assets and bring in strategic investors to operate, maintain, and complete them wherever required. The Indian government set up NARCL to resolve the banking sector’s overall stressed assets in a time-bound manner. Together all three companies including NTPC, PPL and NARCL can make these acquisitions through partnership, suggests the report.
Resolution of the power sector can be a viable alternative to installing additional thermal capacity. Strategic acquisitions have successfully resolved some power sector NPAs as they result in higher bids and lower-than-market value for lenders, given the higher value of underlying assets for strategic buyers, he claims.
Coal carries a risk of stranded assets
Other than the government’s order to NTPC for capacity addition of coal thermal power plants, the recent National Electricity Plan (NEP), also talks about capacity addition. The projected capacity addition of coal power plants requirement during the period 2022-32 is around 51 GW, according to the NEP.
India has an under-construction thermal capacity of 25.5 GW that is likely to be commissioned over 2022-2027, the NEP confirmed. The NEP estimates that Rs. 2184.3 billion is required for TPP capacity addition between 2022-2027. Similarly, Rs. 1858.55 billion will be required for thermal projects from 2027 to 2032.
In 2026-27, the cost per MW TPP capacity addition is Rs. 95.1 million, while solar will cost Rs. 48.4 million and wind will cost Rs. 68.4 million. In 2032, the same will reach Rs. 108.2 million, Rs. 53.3 million, and Rs. 77.9 million, respectively.
The cost economics of renewable energy versus thermal power is fast changing, and TPPs risk turning stranded on the books of Indian lenders.
The cost of renewable energy is gradually coming down. Srivastava said, “New build solar in India is already the cheapest source of electricity in several cases. Currently, solar integrated with storage is not as competitive as many pits head-fed thermal plants but given the history of cost deflation observed in solar PV and storage technology, and the cost projections over the next couple of years, there is a very real risk that in the merit order, solar+storage might be superior to several new built thermal plants too. This will head to a stranded asset risk for new thermal assets. Additionally, thermal assets are inflationary, given coal is an inflationary commodity, and setting up brownfield thermal capacity can take significant time during which the cost economics of RE+storage might change.”
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, he added.
Energy expert Debajit Palit says that it is for individual companies like NTPC to take a call on whether to acquire stranded plants or build new ones, based on viability assessment. “But we need the additional capacity to meet our increasing energy needs especially if we are to transition to a middle-income country and coal looks like a strong option in the short to medium term, given every energy source has its own set of challenges,” he said, referring to intermittency of solar, wind and submergence or loss of biodiversity in large hydro and other energy projects.
Banner image: A thermal power plant in Tuticorin, Tamil Nadu. Representative image. Photo by Ramkumar/ Wikimedia Commons.