Moody's, ICRA: Stable outlook for Indian power sector over next 12-18 months

Moody's Investors Service and its Indian affiliate, ICRA on Monday said that their stable outlook for the power sector in India over the next 12-18 months reflects their expectation of generally stable industry conditions and government policy initiatives.

Improvements in the financial position of state-owned electricity distribution companies are likely to be seen in this period.

"India's state-owned power distribution companies will demonstrate weak to moderate financial profiles. Nevertheless, we do not expect the emergence of material off-taker risk over the next 12-18 months. Consequently, India's independent power producers should maintain credit metrics consistent with their current credit quality," said Moody's VP and senior analyst, Abhishek Tyagi.

The Indian 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 distribution companies, thereby alleviating off-taker risk, which is a key negative factor for the credit quality of power generators, Moody's said in an official release.

India 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. However, the growth in renewable generation capacity will put pressure on conventional power generation.

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

The rise in India's share of renewable energy in the overall capacity addition will be aided by improved tariff competitiveness, a supportive regulatory framework and strong policy support.

However, 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. For example, the recent aggressive bidding by independent power producers (IPPs) for solar and wind energy projects poses credit concerns.

"While the stressed thermal assets remain significant, 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, said ICRA.