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Implementation a challenge for power sector reforms

Merchant power rates to go up

Jyoti Mukul  |  New Delhi 

The government’s two-pronged approach to set the power sector on the right track may not yield much result with India Ratings maintaining that the fuel risk in power sector will continue this year. The agency, however, expects merchant power tariffs to rise during 2013.

The Fitch group company sees implementation of reforms at the state power utility (SPU) level as well as of those initiated to mitigate fuel shortages as key issues in the power sector growth.

The agency expects that its rated entities will manage the key sector risks in 2013 considering a favourable tariff mechanism, their comfortable liquidity and support from the central and state governments. Therefore, India Ratings has maintained a Stable Outlook on its rated power sector entities for the year. India Ratings-rated power producers include NTPC (‘IND AAA’/stable), NHPC (‘IND AAA’/ Stable), Rural Electrification  Corporation (‘IND AAA’/Stable), Reliance Infrastructure Limited (‘IND AA’/Stable).

The stoppage of short-term credit from the banking system and pressure from the central government resulted in some reform measures at the SPU level in 2012 like tariff hikes and restructuring package. However, the ability to further increase tariff may have reduced, said Salil Garg, director, corporates, India Ratings & Research told Business Standard. “A quarterly fuel adjustment translating to about 6-8 per cent increase in tariff annually should be politically feasible,” he said.


Tariffs hikes coupled with operational efficiencies (like lower aggregate technical and commercial losses and lower operating costs) and successful implementation of the restructuring package is a long-term solution for turnaround of the distribution companies (discoms). Without a multi-dimensional approach, the problems would have only been successfully deferred and not resolved, India Ratings said in a report released today.

The tariff hikes might not be sufficient to cover the current revenue gap in some cases and might not result in full recovery of regulatory assets in others and thus cannot singularly lead to an operational turnaround. Moreover, most states have hiked tariffs steeply for industrial consumers, while sparing domestic consumers. As the ability of discoms to cross-subsidise is limited, consumers might push back. Therefore, continued tariff increases over a short period of time might not be a feasible option for the discoms.

A presidential directive was issued to CIL to sign fuel supply agreements (FSAs) with power developers for 51GW capacity commissioned/likely to be commissioned over FY10-FY15. “Power plants set up post-2009 will continue to face fuel problems,” said Garg.

With the liquidity profile of the SPUs post the tariff hikes improving, their ability to buy from merchant power will improve. Cost of merchant power will, however, go up with increase in fuel prices, high energy and peak deficits, increasing percentage of imported coal in overall coal supply and low plant load factors for available capacity due to fuel shortage will also lead to.

First Published: Wed, January 16 2013. 15:02 IST
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