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ICRA revises year-end outlook to negative for conventional power sector

Alvaro Ledo Nass, Madrid, España
ICRA revises year-end outlook to negative for conventional power sector

Kolkata: Capacity utilisation of coal-fired power plants is set to decline in FY20, following a slowdown in power demand growth from 6.4 per cent in the first eight months of FY19 to 1.2 per cent during FY20 and higher generation from hydro and renewable sources, according to estimates by ratings agency ICRA . It has prompted the agency to revise its year-end outlook for the power sector from stable to negative. The rating is driven by critical factors like a slowdown in energy demand growth, sluggish progress in the resolution of stressed thermal assets and; less than expected improvement in discom’s finances. According to ICRA Research, demand growth turned negative since August 2019, which declined by 12.9 per cent in October 2019 and 4.3 per cent in November 2019 on a Y-o-Y basis. This can be attributed to lower demand from household and agriculture segments following higher than usual rains in August 2019 to October 2019 and; moderation in demand from the industrial segment. A slowdown in power demand growth coupled with higher generation from hydro, nuclear and renewable sources led to a decline in capacity utilisation to 56.6 per cent in the first seven months of FY2020 from 60.2 per cent in the corresponding period of the previous year. Sabyasachi Majumdar, group head & senior vice president, ICRA, said: “ICRA expects subdued energy demand growth coupled with higher generation from hydro, nuclear and renewable sources to suppress average capacity utilisation of coal-fuelled power plants to about 59.0 per cent in FY2020 from about 61 per cent in FY2019. Nonetheless, the same is expected to show a gradual recovery over the medium term with decommissioning of older thermal projects, slow pace of new capacity addition and expectations of recovery in industrial energy demand. Further, the absence of fresh long term power purchase agreements over the last few years and the delays in implementation of medium-term power purchase agreements as awarded in the last one year under the central schemes remain the areas of concern for the IPPs.” ICRA notes that the progress on stressed asset resolution also remains slow, with only about 10 per cent of the 40 GW stressed coal-based capacity, achieving resolution. This is because of the long lead time to achieve a sustainable resolution, limited progress in signing of new long-term power purchase agreements and still subdued thermal PLF levels. Given the slowdown in demand growth and lack of visibility on long-term power purchase agreements, the resolution of stressed assets may remain slow in the near term. While the provision of letters of credit (LC) or advance payments have been made mandatory from August 1, 2019, which is a a positive development for independent power producers and generation companies, the implementation of the same has been mixed so far and does not address the issues pertaining to recovery of old receivables. Domestic coal supply contract availability has also shown improvement and along with this, the provision of such contracts against short term power purchase agreements remains positive, especially for about 15 GW of capacity which does not have long term PPAs as of now. Further, the credit profile of generators with cost plus-based long term power purchase agreements are unlikely to be affected due to slowdown in demand, assuming there are no material under-recoveries in energy costs. “On the distribution front, the progress in improving the financial profile of the discoms , as envisaged under the UDAY scheme remains slow, given that the reduction in AT&C losses is lower-than-expected in some of the key states and as the tariff revisions across the majority of the states remained inadequate and not reflecting the movement in the cost structure. With higher subsidy dependence expected to continue, the discoms book losses are likely to witness an uptrend in FY2020 at an all India level,” said Girishkumar Kadam, sector head & vice president, ICRA. This is also evident from an upward trend in dues from discoms to power generation companies, which stands at more than Rs. 800 billion as of September 2019 as per the data from PRAAPTI dashboard. Sustained focus on efficiency improvement & tariff adequacy thus remains critical for the viability of state-owned distribution utilities in the long run. Follow and connect with us on Twitter , Facebook , Linkedin

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