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New Thermal Power Investments Could Result In Stranded Asset Risk

By Outlook Planet Desk June 16, 2023

A new study by think tank Institute for Energy Economics and Financial Analysis (IEEFA), has emphasised that reviving 6.1GW of stranded thermal power plants is better for India than investing in new fossil-fuel-based capacity

New Thermal Power Investments Could Result In Stranded Asset Risk
NTPC.
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According to a recent report by the Institute for Energy Economics and Financial Analysis (IEEFA), purchasing and subsequently reviving stranded thermal plants is a better option for all stakeholders, despite the government's request that NTPC, India's largest power producer, add 7 gigawatts (GW) of brownfield thermal power capacity.

According to the paper, NTPC could join with other government-owned firms, including Power Finance Corporation, REC, and National Asset Reconstruction Company Limited, to strategically acquire six facilities with a combined capacity of 6.1 GW.

 “In light of energy security concerns, strategic acquisitions and subsequent revival of the stranded power sector capacity present in India can be a viable alternative to adding new thermal assets,” says Shantanu Srivastava, Sustainable Finance and Climate Risk Lead, South Asia, IEEFA.

“IEEFA believes any new investment in thermal power can potentially lead to stranded asset risk, given the clear economic case of renewable energy over thermal power. Financing these thermal plants will expose domestic banks to another set of potential power sector non-performing assets (NPAs) and a higher climate risk in their portfolios,” he adds.     

The study claims that a plan to deliberately buy and revive NPAs in the power industry will also help Indian banks, which have been struggling with large NPAs for more than ten years, clean up their books.

“It will give the banks more headroom to contribute towards achieving India’s ambitious clean energy goals,” says Srivastava.

According to the research, NTPC can collaborate with other government-owned businesses, including the National Asset Reconstruction Company Limited (NARCL), India's bad bank, and the recently formed Power Finance Corporation (PFC)-REC joint venture, PFC Projects Limited (PPL).

Through the use of case studies, the study makes the point that by collaborating with either PPL or NARCL, NTPC may drastically reduce upfront costs while increasing capacity to meet India's immediate demands for energy security.

“NTPC can undertake work on providing coal linkages and power purchase agreements where required, while PPL can provide finance for working capital requirements,” says Srivastava.

“On the other hand, there are examples of asset reconstruction companies acquiring stranded assets using a 15:85 model, wherein it pays 15% of the consideration amount upfront and issues security receipts for 85% of the consideration amount, payable on recovery of loans. Partnering with NARCL, with the 15:85 central to its strategy and security receipts having a sovereign guarantee, to acquire some of the stranded thermal assets means that NTPC will not have to invest much capital upfront,” he adds.

The paper also emphasises that the first phase should be acquisition and revival because adding new or acquired thermal assets will negatively impact the acquirer's environmental, social, and governance (ESG) profile.

“NTPC aims to install 60GW 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,” says Srivastava.

“The company can also explore the burgeoning market for carbon credits trading to further improve returns from repurposed projects,” he adds.

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