Thermal power is back in business as govt makes commitment clear

Deals in Punjab and Odisha shows coal-fired plants are crucial to economy

Punjab bought in January a private coal-fired plant for Rs 1,080 crore and before that Odisha public sector BHEL won a bid to build three such units for some Rs 20,000 crore, showing that withdrawing from thermal power was “premature”.

Not without reason. Late November, Union Minister R K Singh said: “Given the power needs, the industry will keep getting orders for thermal capacity addition for the next five-seven years”. “Thermal energy was written off a few years ago, which was premature,” he said in a meeting with power companies and others.

The capacity building is a change from 2017-18 when about 25 gigawatt (Gw) of thermal power plants did not have buyers in the market. In the process, the non-performing assets of banks that had financed these plants shot up.

The difference now is the central government’s clear commitment to thermal power. “The country absolutely needs at least 80 Gw of capacity addition (from thermal) from today till 2031-32, which is essential to meet our base load requirements,” said Power Secretary Pankaj Agarwal at the same meeting.

Punjab State Power Corporation bought the 540 megawatt (Mw) thermal power plant in Goindwal Sahib, Taran district, from GVK Energy. The plant was under insolvency and Chief Minister Bhagwant Singh Mann announced its purchase on New Year's day.

A day earlier BHEL told stock exchanges it will build three units of 800 MW each for NLC India’s thermal power plant at Talabira in Odisha. BHEL was the best bidder for the Rs 19,422-crore turnkey contract. As NLC India, which is owned by the central government, plans to build another 800 MW unit at the site, the project size could expand.

It is open to debate if Punjab should have bought the power plant from a heavily indebted company. GVK Energy had a liability of Rs 17,915.83 crore as on June 30, 2023. The attempt to apportion one of the mines in Talabira from NLC to private sector Hindalco, to ensure faster usage of coal, became a controversy in the so-called “coal scam”.

Yet the deals in Punjab and Odisha show interest in the thermal power sector has returned. Mithun Vyas, team leader at CRISIL Ratings, said: “Overall, we expect coal-based power plants rated by us to witness over 20 percent year-on-year rise in cash flow from operations”, in Financial Year 2023-24 (FY24). Vyas estimated that cash flow to total debt for these power plants will improve from 11 percent as on March 31, 2023, to an estimated 15 per cent by March 31, 2024. The math is interesting for thermal energy buyers and investors.

A report by Centre for Financial Accountability and Climate Trends said that in calendar year 2022 no-coal fired projects in India received fresh financing. It was the second year straight that this had happened though volumes for the energy sector had declined.

Investment in coal-fired projects will have to come from Indian institutions. British International Investment, the UK government’s development finance institution, plans to invest $250 million into India in 2024 but none in coal. Domestic investors were keeping off coal too till a few months ago.

In a meeting with the Coal Ministry in June 2023, coal mining companies highlighted problems in getting bank financing. A government release issued after the meeting noted these included “high cash margin for bank guarantee issuance, stringent pre-disbursement conditions (and) negative outlook of coal sector in banking fraternity”. The release said: "banks expressed their willingness and assured flexibility to finance coal mines subject to demonstration of, among other things, project viability, equity infusion visibility etc. in presence of a detailed business plan". In other words, the two sides blamed each other.

This has begun to change. The Reserve Bank of India’s data on sectoral deployment of bank credit shows loans for power sector projects (mostly coal) have grown by 1.3 per cent as on 17 November compared to the March 2023. However, year-on-year, lending is still stagnant.

The coal industry grew 10.9 percent in November 2023 in data for eight core sectors. The industry’s cumulative index April to November increased by 12.8 per cent year-on-year. Coal, which is part of thermal power, is back in business again.