Low power generation capacity utilisation will continue in 2017 on higher generation capacity and only gradual recovery of state-owned distribution utilities, expects Fitch.
Fitch Ratings believes sustained improvement in distribution companies’ financial profiles will hinge on the gradual reduction of network losses. Generation and transmission utilities will in turn benefit from timely clearance of dues and higher utilisation rates.
It predicts that state distribution companies struggling with years of cash losses will have breathing space in 2017, with 16 states and a union territory signed up for voluntary financial and operational restructuring of their distribution utilities.
Tri-partite agreements that allowed central government-owned utilities – NTPC, NHPC and Power Grid Corporation of India Ltd – surety to ensure collection of dues from the distribution companies lapsed in October 2016. There is no clarity yet when or which, if any, of the agreements will be extended. Any consequent increase in receivables for the utilities would be credit negative.
Fitch expects state utilities to have large capex requirements in 2017. This will lead to only marginal improvement in their credit metrics. However, Fitch expect the ratings to remain stable. The linkages with the sovereign also provide a rating buffer for these entities.
NTPC, NHPC and PGCIL will benefit from regulatory certainty under the current five-year tariff period through end-March 2019. Most of the investments in the next few years will be under the traditional cost-plus model, providing companies with greater security on returns. However, new projects – both thermal generation and grid – in India will be offered through a competitive bidding mechanism.
Fitch also expects greater private-sector participation in grid assets as more projects are tendered, although PGCIL will account for more than two-thirds of new capacity investments. It expects rated companies – PGCIL, Adani Transmission Limited and NTPC – to bid prudently for new projects under competitive bidding.
Interest and investments in renewable energy will continue, supported by government policy initiatives. However, bidding discipline – especially in solar – remains an issue.
“We expect electricity prices to continue to hover at their low levels in 2017. This will be driven by high generation sent out from power stations, continued grid congestion and poor financial health of the distribution companies limiting off-take,” the Fitch report said.
Fitch expects issuers, including smaller renewable players, to continue to tap offshore markets to diversify their funding sources and take advantage of potentially lower interest rates. This will free up bank facilities as well.
Nevertheless, a failure to rehabilitate the distribution companies would be negative for the whole electricity sector. Any increase in receivable days for power generators and transmitters would be negative for the financial profiles of these entities. Shea Weber Womens JerseyShare This