Power sector outlook 'stable to negative' in FY17: Ind-Ra

India Ratings and Research (Ind-Ra) has maintained a 'stable to negative' outlook on the power sector for the next financial year as the plant load factor (PLF) of plants is expected to remain low amid muted growth in electricity demand, India Ratings said.

The rating agency expects power demand to grow modestly at 4-5 per cent and power generation at 5-6 per cent in FY 2016-17, with deficits remaining low at 3-4 per cent.

"The muted demand growth would be driven by the expectations of muted growth by industrial consumers, who constitute 40 per cent of the energy sales. Moreover, the current focus on the use of efficient devices (LEDs and agricultural pumps) is leading to lower demand," it said.

The PLFs of the thermal power plants are likely to remain low as demand growth remains muted. Moreover, as the renewable energy share increases, it could exert additional pressure on the PLFs of coal-based plants.

"Until the financial position of the discoms improve, they will continue to prefer load shedding rather than supply power to the consumers, due to the average loss incurred of Rs 1.14 per unit on each unit supplied," Ind-Ra said.

It further said state electricity distribution companies (discoms) are still to see a financial turnaround, despite the announcement of Ujwal Discom Assurance Yojana (UDAY) scheme, which is a welcome move to bring about operational efficiencies and a financial turnaround.

The agency also expects the coal output to increase by 10 per cent in the next financial year to reach 594 metric tonnes, given the government's focus on achieving the targeted one billion metric tonnes by 2020 and on the back of the strong performance this financial year.

"Higher output will come from ramping up output from existing and new mines and better efficiency. Given the increase in domestic coal output, coal imports to India could decline by 10-15 per cent, which is likely to exert pressure on volumes of large coal importers," it said.

Ind-Ra expects solar tariffs to decline to Rs 4 per unit by next financial year (the lowest bid in FY 2015-16 stood at Rs 4.34 per unit), which, it said, will accelerate its adoption.

"Lower tariffs will be driven by financial, technical and counterparty improvements. Financially, the cost of capital is expected to decline due to lower cost of debt, increase in loan tenors, lower equity internal rate of return expectations, and higher project leverage," it said.

The headroom for discoms to increase tariffs further remains limited, given the substantial tariff hikes taken between FY2012-FY15 and the emergence of solar power as an alternative source of cheap and decentralised generation.

"Against the backdrop of limited possibility of tariff hikes, discoms will be forced to improve their operational efficiency by lowering aggregate technical & commercial (AT&C) losses, power purchase cost rationalisation and lowering of interest costs. The reduction in AT&C losses to 15 per cent from 22.7 per cent in FY-14 can yield additional revenues of Rs 25,600 crore, which is nearly 41 per cent of the book losses in FY14," Ind-Ra said.

The agency, however, noted that the outlook could be revised to 'stable' on directional movement towards improvement in the financial health of discoms, better visibility on demand growth for electricity leading to improvements in PLFs.