Fall in imported coal use positive for power sector: Moody's

The fall in consumption of costly imported coal by Indian power producers is a key credit positive for the power sector and independent power producers (IPPs), Moody's Investors Service said on Monday.

"However, the power sector faces persistent challenges, including uneven gas supplies, cost over-runs at some generating plants, and limited off-take in demand for their electricity from financially weak distribution utilities," said Moody's vice president Abhishek Tyagi.

"Some IPPs are also locked into power purchase agreements (PPAs) that have become unviable because they do not allow rising fuel costs to be passed through," he said, adding that all these factors will continue to weigh on the sector's credit profile.

State miner Coal India, which accounts for over 80 percent of domestic coal output, raised its production by 7 percent in 2014-15, and by a further 9.4 percent in the first five months of the current fiscal.

According to Moody's, output rose after the government initiated a process of auctions and allotments for coal mines.

"The increase, if sustained, will be a key positive for IPPs, as it will reduce their dependence on costlier imported coal and improve their financial profiles," Tyagi said.

The report said that assuming a compound annual growth rate of 7 percent in domestic output, power producers' dependence on imports would to fall to 8 percent by 2019-20 from 25 percent currently, reversing the sharp rise in imports dependence between 2011 and 2015.

"However, if domestic output grows at a more moderate 4 percent between FY 2016 (2015-16) and FY 2020 (2019-20), and if the ramp-up in production from the allocated mines is delayed by one year, the decline in import dependence will likely stall to 18 percent by FY 2020," Moody's said.

Moreover, the financial weakness of the state-run distribution utilities has constrained their ability to enter into long-term PPAs with the generators.

In turn, the scarcity of long-term PPAs has undermined power generators' ability to secure binding fuel supply agreements for cheap domestic coal, as generators backed by long-term PPAs are given preferential access to such supply arrangements, said the American agency.