Relieving stressed thermal coal and banking sectors within and outside India's national tribunal (NCLT)
The recent decline in thermal power demand is seeing power plant utilization rates drop to decade lows, acting as a new key headwind against sustained resolution.
Despite a number of years in the making, the issues leading to Indian thermal power assets becoming white elephants remain largely unresolved and problematic.
Non-payment in India’s thermal power generation sector - plagued by a staggering US$40-60 billion (bn) of nonperforming or stranded power generation assets - continues to seriously undermine the banking sector, particularly with the growing number of financially stressed, underutilized power plants.
In recent months, however, there has been some progress made in addressing the growing problem of stranded assets.
The National Company Law Tribunal is leading several resolution processes to revive stressed assets in the power sector. Some settlements have been achieved under the Insolvency and Bankruptcy Code (IBC) – like NHPC’s takeover of the Lanco Teesta Hydro power project settled in October 2019. For others, settlement has been completed outside the IBC resolution process via a change in management, including Adani Power’s acquisition of GMR Energy Chhattisgarh in August 2019, Renascent Power Ventures’ (Tata Power and ICICI Bank) 75% acquisition of Prayagraj Power in December 2019, and Agritrade Resources’ acquisition of SKS Power Binjokte in late 2018.
Despite this progress, IEEFA notes project resolutions have been limited to-date. Added to this, the recent decline in thermal power demand is seeing power plant utilization rates drop to decade lows, acting as a new key headwind against sustained resolution.
IEEFA’s recent report, Seriously Stressed and Stranded: The Burden of Non-Performing Assets in India’s Thermal Power Sector, reviewed twelve non-performing power generation projects. One of those projects was the 1.35 gigawatt (GW) Nashik Thermal Power Plant, a coal-based plant located in Sinnar near Nashik in Maharashtra and owned by RattanIndia Power Limited. This plant became stranded due to outdated technology, the lack of viable long-term power purchase agreements (PPAs), and unresolved land acquisition issues resulting in the absence of the final mile of rail linkage, meaning no access to coal supplies. The Nashik Thermal Power Plant is undergoing a resolution process outside the parameters of the IBC, with the same promoters.
Another non-performing project by Rattanindia Power Limited, the 1.35GW Amravati thermal power project located in Nandgaonpeth village in Amravati district, Maharashtra, is also going through a resolution process. This project became part of a deal in December 2019 described as the largest settlement outside the NCLT framework without a change in management.
The Amravati plant’s existing debt of Rs65,750m (US$926m) carried by a consortium of lenders led by PFC and SBI, was taken over by new investors, including Goldman Sachs and Varde Partners, at a discount of 38% for Rs40,500m (US$570m). The deal resulted in a total loss on debt of Rs25,250m (US$356m). The total project loss is massive (possibly more than 50%) when compared to the actual historic investment value (US$1.3bn) of the asset.
As part of the deal, the RattanIndia Power board also issued securities to asset reconstruction company Aditya Birla ARC Limited, including ordinary shares at Rs10/US$0.14/share and preference shares at Rs100,000/US$1,400/share amounting to Rs8,057m and Rs6,655m (US$112m, and US$93m) respectively, with the aim of reducing RattanIndia Power’s outstanding debts owed to the original consortium of lenders.
The Amravati deal is the first transaction to close under the Reserve Bank of India's revised framework for stressed asset resolution announced in June. It is also being touted as the first of its kind, where foreign investors replace Indian lenders through a process of resolution outside the NCLT framework. In the past, deals resolved under the NCLT framework were settled at Rs1.2-1.5 crore/MW. The Amravati transaction was closed at Rs3 crore/MW (US$0.42m/MW of capacity). The deal is seen as showing the global investment community’s continued faith in the Indian economy.
While the deal suggests doors can open for fresh capital to flow into the distressed thermal power sector (post write-downs), the transaction is also being considered as a reaffirmation of the excellent long-term economic growth potential in India, and the critical role the power sector will play in supporting that growth.
The recent downgrade of India’s outlook from stable to negative by rating agencies such as Moody’s and multilateral organisations like the International Monetary Fund (IMF), due to concerns that the country's stalled economic growth will remain materially lower than previous years, suggests otherwise.
Electricity demand, a key indicator of economic activity, has been growing relatively consistently at over 6% annually during the last decade in India. However, in the nine months fiscal year to-date (April to December 2019), India’s national electricity demand slowed to just +0.6% growth, with the last four months actually reporting a year-on-year decline.
IEEFA notes there is a key financial risk for coal-fired power plants. With exceptionally strong hydro-electricity generation, India’s coal-fired power generation is down 25 terawatt hours year-to-date (-2.5% year-on-year). Once built, non-mine mouth coal-fired power generation has the highest marginal cost of operation. It is more financially exposed to weaker than expected demand and increased zero-marginal cost supply of renewable energy in the power generation sector. Coal shortages, the power distribution company’s (DISCOMs) poor ability to pay for supply, a lack of accountability by promotors, air pollution regulations, growing water scarcity pressures, and the increasing cost-competitiveness of renewable energy are other drivers contributing to stressed coal-fired power in India.
As thermal power continues to lose market share, India has made progress in renewable energy installations. In the last three years, net capacity additions have been 10-14GW annually, while the net capacity addition of coal-fired capacity has reduced to 3-4GW annually. Renewable energy will continue its upward trajectory in the long term as the technology is cheaper with significantly lower externalities (near zero carbon emissions, air and particulate pollution, and water usage), in addition to the growing availability of debt and equity financing, and increasing economic advantages.
Renewable energy installations would increase more but for the national burden of the many non-performing thermal assets in the power sector. The banking system is hamstrung, unable to extend the necessary traditional energy sector flow of capital that is critical to sustained, strong economic growth in India.
India should cancel those coal-fired power plant proposals that are currently floundering and stalled, rather than investing more good money in bad assets without addressing the underlying drivers of asset stranding.
Vibhuti Garg (email@example.com) is an IEEFA energy economist.