India’s power sector needs investment to maintain economic growth and improve the livelihoods of the millions of people still without electricity. Yet banking reform proposals could make more of the country’s power projects financially unviable – potentially hampering future investment.
The Reserve Bank of India this year published a framework for resolving the country’s financially-stressed assets that would mean short-term pain but longer-term gains for the economy. However, for the power sector, it exacerbates existing financial difficulties.
India’s power sector had USD81 billion of outstanding loans in June 2017, of which USD25 billion relates to 34 projects capable of generating 40GW. These projects face financial stress because of under-utilisation, cost overruns from delays, or low tariffs. About USD5.5 billion of the loans were already non-performing in 2017, with borrowers unable to make payments within 90 days of the due date.
Now the Indian parliament’s energy committee puts the total capacity of stressed coal-based power assets at about 55GW. These new plants’ non-performance is blamed on poor coal-supply links, the absence of power purchase agreements because of weak demand, delayed payments by distribution companies, plus regulatory and legal issues.
However, we think climate change and air-pollution concerns could also be a factor: power generation from renewable sources increased more than 60 per cent in two years compared with just 15 per cent for conventional power. Cleaner energy now accounts for 7.8 per cent of total generation.
India has a target to install around 175GW of renewable capacity by 2022 to achieve its commitments under the Paris Agreement on Climate Change.
We think renewables can contribute to both economic growth and energy access as well as helping India meet its climate pledges. In 2017, new renewables capacity exceeded newly-installed coal-fired capacity for the first time – 11GW against 7GW – and the momentum towards cleaner energy has continued.
In the year to May 2018, the 12GW of renewable installations were more than double the 5GW of coal plants and the price of solar energy fell by over 40 per cent, making it more attractive for new-build projects.
The International Energy Agency estimates that India’s power system needs to grow fourfold by 2040 to meet rising demand and supply 200m people still without electricity.
Historic government five-year plans covering 2007 to 2017 boosted coal power projects, bringing 121GW of coal plants online – three-fifths of current coal capacity. Coal now forms one-third of total installed generation capacity.
India’s current energy plan projects coal capacity picking up in 2022-27 to replace ageing and inefficient infrastructure while meeting peak demand. However, we believe some of this additional coal capacity may be made unnecessary by renewables and effective energy-storage solutions.
Extreme events such as heatwaves, floods, droughts and wildfires have demonstrated the impacts of climate change and India is one of the most vulnerable countries. The Ministry of Finance admits one reason for the power sector’s financial stress is reduced generation caused by restrictions on releasing water.
Water – through the monsoons – is important to India’s economy and climate change threatens its availability for power generation as well as agriculture.
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