Ind-Ra sees power output rising more than 5%; tariff hike in second half only

On the back of higher domestic coal availability and higher availability and acceptability of imported coal, India Ratings & Research (Ind-Ra) expects power generation in the country to increase between 5 to 6.5% in 2014-15.

Besides, coal production would also increase due to faster progress on project clearances through coordination between coal and environment ministry and closer monitoring of captive coal blocks.

In power sector outlook for 2014, Ind-Ra, however, predicted that given the general elections are scheduled for mid-2014, many states could loo at not hiking tariffs or reduce tariffs by increasing subsidy.

Delhi, Haryana and Maharashtra have already announced lowering of consumer tariffs. “First half of the year it will be difficult to see increase in tariffs but in the second half, hikes could come into play,” said Salil Garg, director, corporates, India Ratings.

While maintaining a stable outlook on its rated power sector entities for next year, the outlook reflects their continued ability to manage the issues associated with fuel and state power utilities (SPUs) due to a favourable tariff mechanism, their comfortable liquidity and support from the central and state governments.

For the power sector, however, the agency has assigned a stable to negative outlook reflecting the pending policy level issues, manifestation of risks undertaken in earlier years, mismatches in coal demand and supply and continued tariff pressures.

In line with Ind-Ra’s GDP growth estimate of 5.6%, the increased generation would be on the back of higher domestic coal availability post the government of India’s initiatives in the coal sector and higher availability and acceptability of imported coal than before.

Power generation could also improve on an easing of liquidity situation at the SPU level post financial restructuring package (FRP) implementation as it would lower back-down instructions and increase the ability to buy power.

At the same time, cautious bank-lending to SPUs and moderate demand from the manufacturing segments could lead to the energy deficit remaining at 4.5% in FY15, after declining to 4.5% in first eight months of FY14 (April to November) from 8.7% in FY13.

Garg said the Central Electricity Regulatory Commission in its draft guidelines for 2014-2019 has changed the basis for calculating incentives and disincentives and this could impact the return on equity earned by thermal-based central generating stations.

However, positives with respect to water availability and operations and maintenance could partly mitigate the impact. As these are draft guidelines, a conclusive view will emerge post completion of the consultation process currently underway and the finalisation of guidelines.

Ind-Ra expects the sector to witness consolidation through asset buyouts by strategic investors. It would be driven by the government’s initiatives to resolve key issues plaguing the sector. Depreciating rupee and the deleveraging plans of independent power producers have further fuelled investor interest.

Garg said highly leveraged corporates are trying to sell assets and some deals might go through. “Besides Rs 50,000 crore investment likely in the two ultra mega power projects, any new investment would come only if there is coal block auction going forward,” he said.

Average merchant prices for FY15 are likely to be at FY14 levels at an all-India basis. Prices in the southern power grid have fallen and could decline further post its inter-connection with the national grid during January 2014. Prices may increase intermittently during the pre-election period on account of strong buying interest from SPUs.