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8:52 pm - Thursday April 26, 2018

Moody’s & ICRA predicts stable outlook for Indian power sector over next 12-18 months

Agencies, New Delhi

Moody’s Investors Service and its Indian affiliate, ICRA Limited, has predicted stable outlook for the power sector in India over the next 12-18 months which reflects their expectation of generally stable industry conditions and government policy initiatives.

It will likely lead to improvements in the financial position of state-owned electricity distribution companies. In a press release, Moody’s said that that India (rated Baa2 stable by Moody’s) will see a change in its energy mix towards renewables, as the country adds more capacity and moves towards its commitments under the Paris Agreement on climate change.

However, the growth in renewable generation capacity will put pressure on conventional power generation, although most Moody’s-rated power producers are protected by availability based power purchase agreements.

Moody’s also said that the Indian government’s debt restructuring of the financially weak distribution utilities, under the Ujwal Discom Assurance Yojana (UDAY), will gradually improve the financial conditions of state owned distribution companies, thereby alleviating off-taker risk, which is a key negative factor for the credit quality of power generators.

“India’s state-owned power distribution companies will demonstrate weak to moderate financial profiles,” said Abhishek Tyagi, a Moody’s Vice President and Senior Analyst.

“Nevertheless, we do not expect the emergence of material off-taker risk over the next 12-18 months. Consequently, India’s independent power producers should maintain credit metrics consistent with their current credit quality.”

“Greater funding diversity will help the power companies to expand capacities and add renewable capacities, although corporate-type debt funding will remain dominant for power companies in India,” added Mr Tyagi. “Bonds issued by Indian renewable generators in 2017 are examples of interest by institutional funds in the sector.”

“The rise in India’s share of renewable energy — especially in solar and wind generated electricity — in the overall capacity addition will be aided by improved tariff competitiveness, a supportive regulatory framework and strong policy support,” said Sabyasachi Majumdar, an ICRA Senior Vice President.

ICRA also said that while the medium to long-term outlook for renewable energy is positive, in the near term, capacity additions in the wind energy sector will likely be adversely affected, due to the transition in the tariff regime to a bid-based from a feed-in-based framework. In addition, upward pressure on the module price level, aggressive bidding and the possible risk of anti-dumping duties being imposed could impact fresh bidding for solar projects.

For example, the recent aggressive bidding by independent power producers (IPPs) for solar and wind energy projects poses credit concerns.

ICRA explained that thermal IPPs will see costs rise for power generation, because of capital expenditure requirements to comply with the tightened emission control norms required by the Ministry of Environment & Forests, and also to ensure the operating flexibility to accommodate the increasing share of renewable energy.

Timely approval of pass-through for such increases in cost will be critical for thermal IPPs with long term power purchase agreements. While the stressed thermal assets remain significant (60 GW), due to factors such as tariff non-viability, lack of long term power purchase agreements, uncertainty on domestic gas availability and cost overruns, any further incremental stress should be limited in the conventional power sector, said ICRA.

Posted in: Business

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