Icra’s outlook for thermal power sector stays negative

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Updated: Jan 07, 2021 8:56 AM

Icra’s credit outlook for the renewables remain stable given the fact that renewables would make for 65-75% of the total energy basket in the next five years.

thermal power sectorRenewable's payment realisation from discoms under the liquidity scheme has also improved liquidity of some of the wind and solar IPPs, Girish Kumar Kadam, sector head & V-P, Icra Ratings said.

Even as electricity demand across India is likely to increase in FY22, Icra’s credit outlook for the generation and distribution segments of the thermal energy sector continues to remain negative. But the transmission segment’s credit outlook remains positive because of timely payment realisation. Icra’s credit outlook for the renewables remain stable given the fact that renewables would make for 65-75% of the total energy basket in the next five years.

All India electricity demand, expected to grow between 6% and 7% in FY22 against an estimated decline between 2% and 2.5% in FY 21, would result in an improvement in all-India thermal PLF likely at 57-58% in FY22 against an estimated PLF level of 53-54% in FY21.

Sabyasachi Majumdar, group head & senior V-P – Corporate ratings, Icra, said despite an improved PLF in FY22, it is still subdued and new power purchase agreements (PPAs) for thermal IPPs ( independent power producers) are not in view. Modest tariffs in the short-term power market makes credit outlook of the thermal power segment negative as also problems in 80% of the 40 GW stressed thermal assets in the private sector remains unresolved. But the credit profile of the central power generating utilities get the support for long-term PPAs under the cost-plus tariff structure and strengths arising out of sovereign parentage, Majumdar said.

The credit outlook remains negative for the state discoms for their continued financial weakness, further weakened by the sharp decline in revenues from the commercial and industrial customers during the first half of the current fiscal following lockdown restrictions. Despite demand recovery, the discom losses are likely to remain at more than `75,000 crore in FY22 with inadequate tariff revisions, high distribution losses and additional interest cost on the loans availed under the liquidity support scheme.

The Centre’s Rs 1,20,000 crore scheme, which came as loans from the Power Finance Corporation and Rural Electrification Corporation for clearing dues to the gencos, was the fourth such scheme over the past 15 years but discoms’ efficiencies and financial health didn’t improve. The state governments’ pace of reforming and the utilities’ focus to ensure operational improvements still remains the critical areas, it said.

The credit outlook for the renewable energy is stable due to continued policy support from the Centre, presence of credit-worthy central nodal agencies as intermediary procurers and improvement in tariff competitiveness, as reflected from the recent new low of Rs 2 per unit in the solar power segment.

These factors can contribute in continued strong investment prospects with capacity addition estimated at 11-12 GW in FY22 against an estimated level of 7.5 GW in FY21. About 50 GW of projects are in the pipeline and the supply chain challenges have eased out, Icra said.

Addition in renewables would make 65-70% in the total energy basket over the next five years and the credit profile of the majority of the Icra-rated wind and solar IPPs remain stable because of long-term PPAs, ‘must-run status’ across majority states, good operating performance adequate liquidity buffer and strong sponsor profile despite execution headwinds for under-construction projects and regulatory challenges, mainly in Andhra Pradesh on tariff renegotiation. Renewable’s payment realisation from discoms under the liquidity scheme has also improved liquidity of some of the wind and solar IPPs, Girish Kumar Kadam, sector head & V-P, Icra Ratings said.

The outlook for the transmission segment remains stable with availability-linked payments and timely realisation for the inter-state projects with the billing and collections handled by the central transmission utility under point of connection mechanism. The payments to the transmission utilities, constitute a small portion of the discoms’ cost structure, generally resulting in limited propensity on the discoms’ part to stretch payments.

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