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Ratings agency ICRA has revised the year-end outlook for the Power sector from stable to negative.
It factored the critical factors like the slowdown in energy demand growth, sluggish progress in resolution of stressed thermal assets and less than expected improvement in discom finances, to make this assessment.
According to ICRA Research, the all India electricity demand growth declined to 1.2 per cent in 8M FY2020 on a year-on-year basis against the 6.4 per cent growth reported in 8M FY2019. The demand growth turned negative since August 2019, with demand declining by 12.9 per cent in October 2019 and 4.3 per cent in November 2019 on a year-on-year (YoY) 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 industrial segment. The slowdown in electricity demand growth coupled with higher generation from hydro, nuclear and renewable sources led to a decline in thermal PLF to 56.6 per cent in 7M FY2020 from 60.2 per cent in the corresponding period of 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 the average thermal PLF on all India level 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 the decommissioning of older thermal projects, slow pace of new capacity addition and expectations of recovery in industrial energy demand. Further, absence of fresh long term PPAs over the last few years and the delays in implementation of medium term PPAs as awarded in the last one year under the central schemes remain the areas of concern for the IPPs,” he said.
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 PPAs and still subdued thermal PLF levels.
Given the slowdown in demand growth and lack of visibility on long-term PPAs, the resolution of stressed assets may remain slow in the near term. While the provision of letter of credit (LC) or advance payments has been made mandatory from August 1, 2019 which is a positive development for IPPs/Gencos in the power sector, the implementation of the same has been mixed so far and does not address the issues pertaining to recovery of old receivables.
The domestic coal linkage availability has also shown an improvement and along with this, the provision of such linkage coal against short term PPAs remains positive, especially for about 15 GW of capacity which does not have long term PPAs as of now.
Further, credit profile of IPPs/Gencos having cost plus-based long term PPAs (with take or pay clause and fixed charge liability on off-taker subject to availability) are unlikely to be affected due to slowdown in demand, assuming there are no material under-recoveries in energy costs.
The sustained focus on efficiency improvement and tariff adequacy remains critical for the viability of state owned distribution utilities in the long run.
The domestic coal linkage availability has also shown an improvement and along with this, the provision of such linkage coal against short term PPAs remains positive, especially for about 15 GW of capacity which does not have long term PPAs as of now. Stressed asset resolution is gradually improving as seen from recent GMR Group which sold off its stake in the Chhattisgarh power plant to Adani Power.“ However, stressed assets such as the ones with no PPA and no coal linkage will take time,” said Rupesh Sankhe, Vice President, Elara Capital.
The pain is evident on the distribution side too, noted ICRA. 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. Add to that tariff revisions across majority of the states remained inadequate and with higher subsidy dependence expected to continue, the discoms losses are likely to go up in FY20,” said Girishkumar Kadam, Sector Head & Vice President, ICRA.
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