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Financiers Must Not Compromise In Carrying Out Due Diligence Of Power Projects, Says Dr Ashok Haldia, PTC Financial Services

The golden projects of the yesteryears are in a mess today and are paining us. We have to make sure that we do not repeat the past. There are so many factors that we have no answers to. We have to apply our own discretion wisely

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As the 'Energy sector eats up its own tail', the financing of the power sector is in the doldrums. On one side are the 60,000 MW of stressed thermal power assets and on the other hand are the crashing tariffs of renewable projects, raising questions on their viability. The energy sector financing stands at crossroads with the financiers carrying huge risk burden today.

PTC India Financial Services (PFS), one of the country's biggest financiers of power projects saw their net profit tumbling 74.49 per cent to Rs 21.66 crore Q2 September 2017. Dr Ashok Haldia, Managing Director and CEO, PFS states how the company is constrained by the legacy of stressed assets.

"The golden projects of the yesteryears are in a mess today and are paining us. We have to make sure that we do not repeat the past. There are so many factors that we have no answers to. We have to apply our own discretion wisely," said Dr Haldia on the sidelines of KPMG Energy Conclave 2017, stating how the power sector is no more protected against the risks today and financiers must not compromise on the due diligence of the projects and mitigate all the associated risks.

Similar remains the argument for renewable projects, both solar and wind where financiers are in a fix to finance the same, despite study, research and analysis.

"A lenders meeting was organised when the tariff reached 2.44 per unit. The lenders were scared but still competing with each other. The discipline remained intact in terms of financing future projects and refinancing the ongoing ones," said Dr Haldia, who spelt the fear of discoms dishonouring the earlier signed PPAs at higher prices, making it tougher for financiers to re-finance projects.

Dr Haldia also mentioned that if the renewable sector has to achieve its target of 175 GW by 2022, third-party power purchase agreements (PPA) need to increase, as against relying completely on state discoms.

Third party PPA is a mutual contract between the customer and power producer where the later sells the power generated to the customer at a fixed rate, typically lower than the local utility.

However, third-party PPAs come at their own cost and loom under great uncertainty in the eyes of financiers. There might be 'Delay but not denial' in the case of discoms, but the same doesn't apply in the case of third-party PPAs.

"Third party PPAs can become viable if the commercial arrangement between the financiers and the developer of the project is sane. At the same time, there has to be some fallback from the government's side, in case the customer refuses to purchase power," said Dr Haldia.

Speaking from the other side of the table, Kailash Vaswani, Deputy CFO, Renew Power, elaborated on the need for innovative instruments to finance the renewable projects, as the Indian public sector banks are not in a position to completely finance the RE market. Though the cost of capital has improved with falling interest rates, financing the RE sector will require more innovation.  

In terms of third-party PPAs, Renew power focuses on 'A' category customers and carries out its own mitigation strategies before entering into these contracts.

"We have established a payment security mechanism. If the payment gets delayed, we stop the supply of power and fall back on the security of minimum 2 months held beforehand," explained Vasvani.

Consolidation seems to be the order of the day, echoed both the experts.

"A lot of small developers are finding it increasingly difficult to compete at the auctions, where the tariffs are reaching new levels. They have become stagnant with their investments as the cash flows go into debt servicing. Therefore, it is feasible for smaller players to capitalize and exit," said Vaswani.