Revival of gas-based power capacity may save $16 bn worth of investments for India: Moody's

IDBI, SBI and ICICI set to be the biggest beneficiaries of the plan

The government’s latest plan to revive the stranded gas-based power generation capacity through imports will help save $16 billion worth of investments and banks including IDBI, State Bank of India (SBI) and ICICI are set to be the biggest beneficiaries of the plan, credit rating agency Moody’s said in its latest Credit Outlook report released on Monday.

Power plants using Regasified liquefied natural gas (RLNG) as fuel have been facing significant availability and pricing challenges because the domestic production of LNG has been significantly lower than the assumptions made when the plants were set up. At the same time, importing LNG at prevailing prices has proved difficult because it increased generation costs raising prices beyond the reach of buyers.

“Among our rated banks, IDBI Bank has an especially high exposure to gas-based power plants and would be the key beneficiary of these measures. SBI and ICICI Bank have exposure to Ratnagiri Power Plant, which is the largest gas-based power plant in India, and would benefit as well,” Moody’s said. It added if the measures lead to a revival of these plants, it would be a significant credit positive for Indian banks.

The government’s plan is to make the import of LNG economically feasible for supply to these stranded plants by making the various stakeholders share the higher costs. The central and state governments will provide exemptions from certain applicable taxes and levies on the incremental LNG being imported, while gas transporters and re-gasification terminals will reduce their transportation tariffs, marketing margins and re-gasification charges on the incremental LNG.

Power developers will forego their return on their equity. The Indian government has also proposed to provide support to power distribution companies that buy this power. India has an estimated 24,150 Megawatt (Mw) of grid-connected gas-based power generation capacity. Of this, 14,305 Mw has currently no supply of domestic gas and is stranded. The remaining 9,845 Mw  has also been working at a sub optimal level based on the limited quantity of domestic gas in the country. An additional 7,000 Mw capacity is under construction.

“This capacity involved a significant level of investment, at around $16 billion, most of which was bank financed. To put this in context, the total exposure of the banking system to the power sector at the end of January 2015 totaled around $88 billion, or 9 per cent of total outstanding bank credit,” Moody’s said. Banks, therefore, had a major exposure to gas-based power plants that had a high risk of turning into nonperforming loans.