‘PFC Should Lend More to Renewable Energy Instead of Stranded Assets’

Instead of backing obsolete & uneconomical coal-fired power plants that could soon become stranded assets, state-owned power sector lender, PFC should lend more to support renewable energy capacity addition, suggested by the Institute for Energy Economics and Financial Analysis (IEEFA) in its new findings.

Both Power Finance Corporation (PFC) and Rural Electric Corporation Ltd (REC) are mainly responsible for providing financial support for the country’s power sector.

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IEEFA in its report titled “India’s Power Finance Corporation continues to fund non-performing coal assets” said that, though, PFC and REC both have materially increased their lending to the renewable energy sector, in line with the government’s long-term power sector objectives. However, in FY2018-19, PFC lent USD 1.2 billion to renewable energy projects, which is only capturing less than one-tenth of the market for renewable lending.

Report author and energy finance analyst Kashish Shah said that PFC and REC have lent extensively to coal-fired power projects, with Rs 343,746 crore, or 54 percent of their total loan book, exposed to thermal power, said IEEFA.

This lending has, in turn, accumulated an extensive list of non-performing assets (NPAs) on their balance sheets, amounting to approx Rs 47,454 crore as of December 2019.

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“But IEEFA views the extent of their stranded asset risk significantly higher than this as India’s thermal power generation sector continues to trouble the country’s banks, accounting for USD 40-60 billion in stranded assets,” said Shah.

“And with India’s thermal power generation sector under severe stress from carrying that USD 40-60 billion of NPAs, financing from private banking institutions to the sector has dried up.”

Shah said that “IEEFA views PFC’s lending to new existing or new thermal power developments as extremely risky in light of the expected tariffs on these projects being 60-70% above the prevailing renewable energy tariffs of Rs 2.50-2.80/kWh.”

“IEEFA questions how PFC can expect to get a viable total project return over the 40-year life of thermal power plants given the uncompetitive tariffs these projects require, particularly in light of rising financial distress at distribution companies (Discoms) which are demanding an ever-lower cost of procuring new power generation,” says Shah.

Shah suggested that “given that poor market share and the speed of the global energy transition, we recommend that PFC should strategically pivot to lend more to support renewable capacity growth.”

Thus, the government should take a giant step and consider shutting down ageing thermal power plants which didn’t meet pollution norms. These can be replaced with renewable energy plants which in turn will create capacity for more renewable power into the grid. Scraping ageing thermal plants could help India in reducing its emissions as well as increasing the share of renewables into the country’s total energy mix.

As per the National Electricity Policy finalized in 2018 forecast, mentioned in the NITI Aayog SDG India Index & Dashboard 2019-20, “supercritical thermal power units have risen from 40 (27.48 GW in 2015) to 66 (45.55 GW in 2018) with avoided emissions amounting to 7 MtCO2 in 2016-17.”