India Ratings believes that the implementation of reforms at the state power utility (SPU) level as well as of those initiated to mitigate fuel shortages remain key to power sector growth. The agency expects that its rated entities will manage the key sector risks in 2013 considering a favourable tariff mechanism, their comfortable liquidity and support from the central and state governments. Therefore, India Ratings has maintained a Stable Outlook on its rated power sector entities for the year.
The stoppage of short-term credit from the banking system and pressure from the central government resulted in some reform measures at the SPU level in 2012 like tariff hikes and restructuring package. India Ratings believes that tariffs hikes coupled with operational efficiencies (like lower aggregate technical and commercial losses and lower operating costs) and successful implementation of the restructuring package is a long-term solution for turnaround of the distribution companies (discoms). Without a multi-dimensional approach, the problems would have only been successfully deferred and not resolved.
The tariff hikes might not be sufficient to cover the current revenue gap in some cases and might not result in full recovery of regulatory assets in others and thus cannot singularly lead to an operational turnaround. Moreover, most states have hiked tariffs steeply for industrial consumers, while sparing domestic consumers. As the ability of discoms to cross-subsidise is limited, consumers might push back. Therefore, continued tariff increases over a short period of time might not be a feasible option for the discoms.
The debt restructuring package seems positive as it aligns the interest of the state governments with the discoms by shifting 50% of their short-term loans to state governments. However, the implementation of the package, commitment to performance-linked measures and acceptance by the banking system remain the key challenges.
A presidential directive was issued to CIL to sign fuel supply agreements (FSAs) with power developers for 51GW capacity commissioned/likely to be commissioned over FY10-FY15. Though this has provided some relief, India Ratings sees the risk of domestic coal availability to be high for projects commissioned post FY09. This is because to avoid penalty, CIL will need to provide domestic coal for 65% of annual contracted quantity, requiring it to increase its supply to the power sector to 436mMT by FY15 from 312mMT in FY12 (a CAGR of 12%), which might be difficult. This would lead to increased use of imported coal, however, boiler design and economics and logistics of imported coal would govern overall usage.
An inter-ministerial group, formed to review the progress of the captive coal blocks (CCBs), recommended de-allocation and/ or bank guarantee invocation of certain blocks based on the progress achieved by them. India Ratings believes this to be a step in the right direction as it weeds out non-serious developers; however, the agency does not expect CCBs to contribute meaningfully to domestic output without co-ordinated and expedited effort from all stakeholders. Gas-based power plants will continue to exhibit stress in terms of lower debt protection metrics due to lower gas supplies and the challenges to ramp up production in the near term.
India Ratings expects merchant power tariffs to rise during 2013. This is due to the likely improvement in the liquidity profile of the SPUs post the tariff hikes and debt restructuring package. Higher fuel prices, high energy and peak deficits, increasing percentage of imported coal in overall coal supply and low plant load factors for available capacity due to fuel shortage will also lead to high merchant prices.
India Ratings-rated power producers include NTPC ('IND AAA'/stable), NHPC ('IND AAA'/ Stable), Rural Electrification Corporation ('IND AAA'/Stable), Reliance Infastructure ('IND AA'/Stable).