Three ways to minimize power sector NPAs

The villains in the power sector’s tale of woes haven’t changed in a while: worsening asset quality and rising non-performing assets (NPAs).

Around 51 gigawatt (GW) of thermal capacity is stressed because of the non-availability of coal, lack of assured offtake, and huge under-recoveries due to disallowance on account of various factors. A further around 23 GW of capacity under construction is also potentially stressed.

That’s tantamount to around Rs4 trillion of debt under stress—and potential NPAs.

The gloom is despite the government’s and the Reserve Bank of India’s moves to ease the pressure on banks through strategic debt restructuring, which offers banks equity in lieu of stressed assets, and the scheme for sustainable structuring of stressed assets (S4A), which affords financial restructuring by allowing lenders to acquire equity.

While these schemes provide limited relief to banks by changing the capital structure and postponing the problem of poor potential cash flows, there is a lack of offtake and lack of power purchase agreements (PPAs) and availability of coal.

The offtake issue first: Discoms have shied off power purchase agreements (PPAs)—the last one was in 2016 in Uttar Pradesh for 3,800 megawatt power, only to be cancelled later. They have preferred to buy power through short-term contracts or the open market, given subdued offtake and prices, and significant capacity addition in the past five years.

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