Bank recapitalisation can help revive stressed power plants, but who’d want them?

Bank recapitalisation and the government’s thrust on bad loan resolution may give a fresh lease of life to stressed power plants. The question, however, is who would want to buy or run them?

One reason large capacities of stressed power plants have remained stuck for so long is the unwillingness of promoters and stakeholders to take large write-offs on project values even as they were stranded. This hampered ownership change pushing up the project costs, making them uncompetitive.

Icra Ltd estimates peg the total stressed thermal power projects including gas-based capacities at around 60,000 megawatts (MW). Of these, JM Financial Institutional Securities Ltd pegs 14,300MW as high risk, which lack fuel linkages and power purchase agreements (PPAs) for more than half of the project capacities.

The government’s bank recapitalisation plan can alter the scenario. JM Financial says banks’ ability to take haircuts on loans to stressed projects improves post the capital infusion. The write-downs can lower project costs, making the plants competitive.

But this alone may not be sufficient to turn around the projects. A competitive power plant without a PPA is no better than a stranded asset—the project will continue to make losses. Write-downs and financial restructuring will reduce losses but that can provide only limited relief as excess capacities in the sector and subdued power demand can prolong the current situation, leaving stakeholders with troubled assets. Nor can they pass on the problems to new owners. “Additionally, buyers may await PPA signing for target plants before going ahead with an acquisition,” JM Financial said in a note.

Then there is the question of the potential suitors themselves. There are few companies with strong balance sheets in the sector. According to India Ratings and Research Pvt. Ltd, financial flexibility of large regulated thermal power generators is under stress due to large capital expenditure programmes.

Of course NTPC Ltd is looking to buy stressed assets. But it reportedly has set quite a few conditions such as low project costs, domestic equipment, fuel linkages and compatibility with local coal, fulfilment of which can be a tall order. Further, despite all the talk, NTPC has largely kept to government assets (such as state utilities) in recent years.

In short, the bad loan problem in the power sector may not be easy to resolve. While bank recapitalisation sets the process in motion, the government or the regulator should follow it up with dedicated PPAs (at least for partial capacities), and force financial and ownership restructuring. That will help resolve the current impasse.