India's largest power producer, NTPC, is being urged by the government to add 7GW of brownfield thermal power capacity. However, a recent report by the Institute for Energy Economics and Financial Analysis (IEEFA) suggests that acquiring and reviving stranded thermal plants would be a more beneficial option for all stakeholders involved.

The report identifies six plants with a combined capacity of 6.1 GW that are prime candidates for strategic acquisition by NTPC in collaboration with other government-owned entities like Power Finance Corporation, REC, and National Asset Reconstruction Company Limited.

Shantanu Srivastava, Sustainable Finance and Climate Risk Lead, South Asia, IEEFA, states, "Given energy security concerns, strategically acquiring and reviving the stranded power sector capacity in India can serve as a viable alternative to investing in new thermal assets." He further adds, "IEEFA believes that investing in new thermal power assets may pose risks of stranded assets, given the clear economic case for renewable energy over thermal power. Financing these thermal plants could expose domestic banks to potential power sector non-performing assets (NPAs) and higher climate risks in their portfolios."

According to the report, strategically acquiring and reviving power sector NPAs would also contribute to cleaning up the balance sheets of Indian banks, which have been burdened by high NPAs for over a decade. Srivastava highlights, "This approach would provide banks with more flexibility to contribute to India's ambitious clean energy goals."

The report suggests that NTPC could collaborate with other government-owned entities such as the newly formed Power Finance Corporation (PFC)-REC joint venture, PFC Projects Limited (PPL), and the National Asset Reconstruction Company Limited (NARCL).

By partnering with either PPL or NARCL, NTPC could significantly reduce upfront investments while addressing India's immediate energy security requirements.

Srivastava explains, "NTPC can focus on providing coal linkages and power purchase agreements, while PPL can offer financial support for working capital requirements." He also mentions, "Asset reconstruction companies have employed a 15:85 model, where they pay 15% of the consideration amount upfront and issue security receipts for the remaining 85% to be paid upon loan recovery. Partnering with NARCL, which follows a similar strategy with sovereign-backed security receipts, would allow NTPC to acquire stranded thermal assets without substantial upfront capital investments."

The report emphasises that acquisition and revival should be the initial step, as adding new or acquired thermal assets could negatively impact the acquirer's environmental, social, and governance (ESG) profile.

Srivastava notes, "NTPC aims to install 60GW of renewable energy capacity by 2030, requiring capital from global ESG investors. Therefore, a post-acquisition strategy to retire and repurpose the acquired stressed thermal assets for renewable energy generation would align well with ESG investors and mitigate the risk of future stranded assets on NTPC's books." He suggests that the company could explore the emerging market for carbon credits trading to further enhance returns from repurposed projects.

Read the report: "Cleaning Up the Last Pile of India's Power Sector Non-Performing Assets"

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Source: IEEFA