As MoUs Worth Lakhs OF Crores Are Announced By PFC, REC, Hopes Rise

The Central government’s power project financing arms, PFC and its subsidiary REC, have made a slew of green funding announcements recently. In total, the NBFCs Power Finance Corporation Ltd (PFC) and REC Ltd have signed agreements worth ₹5 lakh to fund projects of major green energy firms. While the PFC signed pacts worth ₹2.37 lakh crore with 20 companies in the clean energy space, REC tied up for ₹2.75 lakh crore.

The memoranda of understanding (MoU) were signed for solar, wind, green hydrogen, battery storage, and electric vehicle companies as well as the manufacturers of green energy equipment, among others, in the clean energy space. Some of the prominent names include Adani, Greenko, ReNew, ACME, Continuum, Avaada, JBM Auto, Megha Engineering & Infrastructure Limited, and Rajasthan Renewable Energy among others.

The announcements involved big numbers, as the one with green energy solutions provider ReNew where the  memorandums of understanding (MoUs) worth ₹64,000 crore, or $7.9 billion, with PFC and REC were announced. According to the MoUs signed with the lenders at the Clean Energy Ministerial meeting in Goa, ReNew will receive ₹32,000 crores (around $3.9 billion) each from PFC and REC for funding its current and upcoming energy transition projects, the Nasdaq-listed firm said.

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In another MoU signed at G20 14th clean energy ministerial in Goa, the ACME Group was allotted a loan of ₹4,000 crore from REC (Rural Electrification Corporation) for its Green Hydrogen and Green Ammonia project in Oman. Additionally, the company agreed to consider loans amounting to over ₹21,000 crore. These funds will be utilized for the development of several projects, including the 380-MW round-the-clock renewable power project in phase 1 of Odisha, phase 1 of Tamil Nadu Green Ammonia projects, and a 600 MWh pumped hydro project.

Avaada has signed the MoU with REC for an investment amount of ₹20,000 crore to fund its own projects over five years.

MoUs are just a start…

While promises of huge investments are a welcome step for setting in motion the accelerated green energy transition by PSUs, MoUs don’t necessarily seal the deal. A memorandum of understanding, while signalling the parties’ willingness to move forward with a contract, is not necessarily legally binding, and a lot depends on the signatories’ intent and the language in the agreement.

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Green projects in India are subject to various regulations and policies at both the central and state levels. Ensuring compliance with these regulations and obtaining the necessary permits and approvals can be time-consuming and complex which may lead to delays in funding or even the cancellation.

Land acquisition and clearances are a major hurdle. Green projects often require large tracts of land, especially solar and wind projects, and acquiring land is historically challenging in India due to legal and social complexities. Additionally, obtaining environmental clearances from authorities is a critical step, and delays in this process can hinder the flow of funding. Further, passing through an assessment of the project’s viability and potential risks is another step. Moreover, disagreement on other small aspects, like interest rates, can derail the commitment. A swift and effective line of action will decide how much of this funding commitment will come to fruition.

A lot would depend on the ability of the firms to carry out the projects, starting with winning tenders to begin with. The completion of earlier projects and their extensions also affects the plans and funding. For instance, Adani Green Energy’s 1.3 GW Solar Projects in Rajasthan and Gujarat extended their completion dates recently.

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The PFC and REC funding are  also clearly directed towards greenfield projects. Thus, the project pipelines of the firms are prerequisites to meet the intended objectives.

Finally, keep in mind that the funding offer is subject to developers themselves findinf the terms attractive enough vis a vis other options in the market.

Behind the Announcements

The announcements for renewable loans by PFC can be attributed to GoI pressing on renewable capacity addition as the nation aims to achieve a renewable capacity of 500 GW by 2030, meeting 50 per cent of total energy requirements from renewables. Further, the global investments are also pressing for green projects for energy transition. More importantly perhaps, it is also a need for these institutions to realign themselves to new market realities and meet global ESG norms, even as they continue to support broader national goals in energy security.

Source: PFC Performance Highlights FY23

PFC has been funding conventional energy projects over green energy projects since long time. For instance, in FY23, the firm had conventional generation share of 62 per cent of its total funding. Notably, PFC had 42 per cent of its Total Loan Book dedicated to Conventional Generation Loan. The conventional generation projects the firm loaned in FY23 include Ammonia co-firing, Flue Gas Desulfurization (FGD), and Thermal Plants. In FY23, the firm loaned about ₹31,947 crores for renewable projects.

The sheer amounts involved, and the balance sheet size of these two firms, along with their existing commitments to other mandated interventions as in the funding to discoms or upcoming thermal projects means that the large announcement of green funding will take some time to play out. For some of the firms involved, it could even go to 2027 and beyond, with the tail end of these commitments possible finishing by 2030.

Seen in the context of a demand for close to $40 billion annually till 2030, or well over INR 3.2 lac crores every year, much more needs to be done.