Cost overrun, lack of long-term PPAs hurt credit profile of IPPs

Debt of Tata Power, Adani Power & others rises to Rs 1.95 lakh cr

Capital cost escalation, domestic coal availability issues, shortfall in domestic gas supply and drying up of long-term power purchase agreements (PPAs) have adversely affected the credit profile of leading IPPs (independent power producers). According to an Icra report, the debt level of IPPs has shot up due to the high capital expenditure.

Between March 2011 and March 2017, the debt coverage metrics (ratio of total debt and tangible net worth) of these companies increased from 1.5 times to 2.5 times. Interest coverage ratio has declined sharply from 4.6 times in FY11 to 1.2 times in FY17. The report pointed out that the overall progress in signing of long-term PPAs by state-owned distribution utilities remained slow. 

Only four states — Andhra Pradesh, Kerala, Telangana and Uttar Pradesh — invited bids for long-term power procurement over the past four years. But, of the total bid capacity of 7,600 Mw by utilities in these states, PPAs have been signed for only 1,400 Mw by the utilities in Kerala and Telangana whereas the signing of PPAs for 2400 Mw by Andhra Pradesh utilities is still pending. Also, the Uttar Pradesh government has cancelled the bidding process for 3,800 Mw which was conducted in 2016. The study has covered eight leading private IPPs, who between them have a generation capacity totalling 40,000 Mw. The total debt level for the eight power producers has more than doubled  from Rs 88,700 crore (as on March 2011 to Rs 1.95 lakh crore at the end of March 2011. The companies sampled by Icra include Adani Power Ltd, Tata Power, JSW Energy, Reliance Power, Jaiprakash Power Ventures, KSK Energy Ventures, Rattan India Power and Jindal Power.

Many of the recently commissioned and under-construction projects with competitively bid-based PPAs remain exposed to the risk of under-recovery of fixed charges because of the significant increase in capital costs following delays in execution, exchange rate volatility, funding problems and such other issues coupled with the non-escalable or limited escalable nature of the competitively bid-based tariffs. 

For Icra’s sample of 23 thermal power IPPs, the average escalation in capital cost is about 40 per cent of the appraised project cost. In the private IPP segment, gas-based generation capacity of about 12,000 Mw is either stranded or under-utilised due to non-availability of domestic gas and reluctance of power distribution companies (discoms) to procure power generated by using Re-gasified LNG because of the higher generation cost.