The Power Finance Corporation (PFC) and REC (formerly Rural Electrification Corporation) are two important public infrastructure financing companies under the ministry of power, which are also the largest lenders to India’s power sector. A new report by Climate Risk Horizons found that these two Non-Banking Financial Companies (NBFCs) are failing to adapt to India’s ongoing energy transition.
The analysis said that the two companies have not diversified sufficiently into new energy technologies (wind, solar, battery storage, EV infrastructure) even as their coal power loan book shrinks. The report warned that without a massive and rapid shift towards financing of renewable energy and other “transition” sectors, the companies’ profitability and share value face a challenging future.
According to the report, without course correction in favour of investments in the energy transition, PFC and REC’s net profits are estimated to grow at a mere 0.2 per cent and 2.5 per cent compound annual growth rate, respectively from FY 2022-2025, due to a slowdown in loan book growth and lower yields.
Cost advantages for renewable technologies, declining profitability in the thermal power sector and climate change concerns have caused a decline in new coal power projects being built, even as private investment has flocked to India’s renewable energy expansion.
PFC and its subsidiary REC have historically been the largest lenders to India’s power sector, but have yet to shift their financing towards renewable energy on the scale needed to deliver continued growth and profits.
The proportion of renewable energy in PFC’s gross loan assets has grown from 4 per cent to just 11 per cent and its share in REC’s loan book has been stable at 3-4 per cent from FY2018 to FY2021. The two companies also have the exclusive mandate to carry out various policy reforms in the power sector, making them important stakeholders in India’s energy transition.
Continued lending to new coal projects will pose a material risk in this regard, as ESG-aligned investors become wary of fossil fuel investments and could stay away from PFC offerings if the company is also financing new coal power plants.
Ashish Fernandes, CEO, Climate Risk Horizons
“Our analysis suggests that continued access to low-cost international capital via green bonds will be key for PFC/REC’s profitability”, said Ashish Fernandes, CEO, Climate Risk Horizons. “Ironically, continued lending to new coal projects will pose a material risk in this regard, as ESG-aligned investors become wary of fossil fuel investments and could stay away from PFC offerings if the company is also financing new coal power plants.”
Focusing on the recent trends in the energy sector, the report said that unlike the past decade, future growth for PFC/REC will not come from coal. The share of coal lending in loan books has declined from 71 per cent to 47 per cent for PFC and 45 per cent to 40 per cent for REC since FY2018. Given the broader shift in climate policy, the report estimated that growth in conventional generation loan books for both the companies will be negative over the coming years.
“PFC and REC will need approximately 142 per cent and 156 per cent CAGR growth in their renewable energy loan book over the next three years in order to deliver a 10 per cent net profit CAGR.
To achieve this loan book growth, they will need to disburse approximately ₹4,97,315 Cr over the next three years, an amount sufficient to meet the debt capital requirement of approximately 89 GW of solar and 38 GW of onshore wind capacity. This would go a long way to meeting India’s 450 GW by 2030 target for renewable energy,” said Abhishek Raj of Climate Risk Horizons.
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