Indian state owned power financing companies PFC and REC to invest $16 billion of cash into green power plants – More of a necessity than a choice

The Indian power minister Piyush Goel has been trying to structurally reform India’s electricity sector by recently introducing the UDAY scheme, in which India’s Achilles heel would be reformed. The distribution companies which owe billions of dollars to Indian government banks and the power financing corporations, have been set on a path to profitability. One of the measures of UDAY is to replace the loans to distribution companies with bonds from their respective state governments. This will reduce the interest rates on the loans, as state governments have a better credit profile than these debt laden distribution companies. While the Indian state owned banks such as SBI, Bank of Baroda etc. will get these new bonds, the power financers such as PFC and REC will get cash. Though it is good news for these companies as there was a real risk of these loans turning bad, it is also bad news.

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The loan book of both companies will shrink drastically, as liabilities cancel out the assets. The nice high spreads of 4-5% that these companies were making will be gone and they will have to rethink where they can profitability deploy this money. Coal and gas power sector in India has come to a standstill as there is no incremental power demand in India, with most generators running at a very low utilization. With no new demand for power loans, PFC and REC are in a bind. Their stock prices have also fallen sharply reflecting this new reality.

Now the 2 companies are all set to heavily invest into the green energy sector, which is seeing a rapid expansion. The solar sector is set to grow from 2 GW in 2016 to almost 10 GW in 2017. This would require almost $8 billion in new loans. This means a massive opportunity for these companies to deploy money, while still meeting their social mandate. These companies will typically look to refinance the loans to solar power projects thus freeing up the capital for solar developers. Note India has set a national solar target of 100 GW by 2022, which means almost $80 billion in debt financing. PFC and REC are well positioned to supply a large chunk of this money.

At present, renewable energy projects constitute nearly 10 per cent of the loan portfolio of REC and PFC. The lack of new conventional coal and gas projects by private companies has also prompted the two companies to shift focus to renewable sector. Under UDAY, the two companies will recover their debt exposure to state distribution companies in cash. PFC and REC have an exposure of over $20 billion to these companies. Asenior REC official said the company had at its board meeting in the last week of December okayed refinancing and takeout financing of large renewable projects. Under take-out financing, the company will completely replace the lenders of a power project, while under refinancing scheme REC will offer loans to projects to help them retire 25-50 per centof their debt.

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