Moody's announces stable outlook for India power sector over 18 months

Moody's also says that the government's debt restructuring of the financially weak distribution utilities under the Ujwal Discom Assurance Yojana will gradually improve state-owned discoms

Rating agencies Moody's Investors Service and ICRA on Monday said they have a stable outlook for the Indian power sector over the next 12-18 months and expects a change in its energy mix towards renewables.

The stable outlook reflects their expectation of generally stable industry conditions and government policy initiatives, which will likely lead to improvements in the financial position of state-owned electricity distribution companies, a statement issued here stated.

"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," it said.

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

Moody's also says that the 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 discoms, thereby alleviating off-taker risk, which is a key negative factor for the credit quality of power generators.

"India's state-owned power discoms will demonstrate weak to moderate financial profiles," Moody's Vice President and Senior Analyst Abhishek Tyagi said.

He added that 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.

"Bonds issued by Indian renewable generators in 2017 are examples of interest by institutional funds in the sector," Tyagi added.

ICRA Senior vice president Sabyasachi Majumdar said 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.

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, he said.

In addition, ICRA said, the 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.

Also, 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 and 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," it said.

ICRA further said while the stressed thermal assets remain significant (60,000 MW), 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.