Ind-Ra: PLFs of Power Plants to Remain at 22 year low, Amid Muted Electricity Demand Growth

Plant load factors (PLFs) of power companies are unlikely to improve in FY17 from the 61.7% in 9MFY16, despite improving fuel supply since demand growth for electricity is expected to stay muted says India Ratings & Research (Ind-Ra). All India thermal plant PLFs have been consistently declining and have fallen 21.5% since the peak of 78.6% in FY08.

Ind-Ra expects electricity demand to grow by 4%-5% and power generation growth of 5%-6% in FY17, with deficits remaining low at 3%-4%. India has added 80GW of coal based generation capacity over FY11-FY15, which gives room for higher generation given the improvement in domestic coal supply and low international coal prices. Industrial demand however which constitutes 40% of the demand has witnessed a muted growth. Moreover, the current focus on use of efficient devices (LEDs and agricultural pumps) is leading to lower demand.

In the Corporate Outlook FY17 a recent report released on 1 February 2016 Ind-Ra has maintained a stable-to-negative outlook on Power Sector for FY17. Ind-Ra has also maintained a Stable Outlook on most of its rated power sector entities for FY17, as the agency expects its rated entities will continue to manage fuel and state power utilities risks due to a favourable tariff mechanism, their comfortable liquidity and support from the central and state governments.

Significant portion of electricity sales goes to commercial/industrial consumers and thus a pick-up in demand in industrial activity is necessary for higher electricity demand. Ind-Ra expects industrial demand to stay weak at 4%-5% growth in FY17. The residential segment is likely to see healthy demand growth of 7%-8%. Agricultural demand is likely to grow by 2%-3% since it would depend more closely on the monsoons and the changeover to energy efficient pumps. The government's initiative for rural electrification would serve a social objective, but the real demand pickup is unlikely in the short term as these would be low consumption centres.

However, given the installed capacities, increased coal output and the low imported coal prices, there is a potential for higher generation growth , but, given that demand is unlikely to increase significantly, the generation growth will be in the range of 5%-6% in FY17 (8mFY16: 4.6%, FY15: 8.4%). As, the demand pick up is unlikely to be commensurate with generation growth the power deficits are likely to remain low. The energy deficit in absolute terms would likely be a mere 40bnkwh-45bnkwh which can be met out of nearly 5.1GW generation capacity. Ind-Ra notes, a higher generation will lead to a further reduction or extinguishing of the energy deficit. There is a possibility that merchant power prices will remain low and additionally, the power plants with the highest cost of production may find it difficult to despatch power. Given that there is idle coal based capacity of nearly 18GW-20GW and that coal fired capacity is running at suboptimal PLFs (61.7%), it is easy to cover energy deficits.

Lower PLFs have resulted in lower incentives for regulated generators as their incentives for the control period FY15-FY19 have been linked to PLF, compared to the earlier availability based incentive. Additionally, a low PLF would lead to lower than benchmark operating parameters for station heat rate and secondary fuel consumption thus lowering the overall plant efficiency. Financially weak discoms have preferred load shedding rather than supplying power to the consumers, as they are incurring losses on every unit of power supplied as reflected in the revenue gap of INR1.14/kwh in FY14 (FY13: INR1.27/kwh).

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