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Sluggish power sector could hit growth: India RatingsComment Share Text size: A A A January 16, 2013 16:05 IST

F uel supply risks and precarious financialhealth of electricity distribution companiescontinue to pose challenges for the powersector, whose slow progress could impact thecountry's economic growth, a report said on Wednesday.

India Ratings & Research, part of global major Fitch Group, alsocautioned that expected investments worth Rs 1,75,000 crore (Rs1,750 billion) in various power projects could turn into non-performing assets unless fuel issues are resolved.

"Non-availability of sufficient power as well as insufficient powergeneration capacity addition could impact the country's overalleconomic growth," India Ratings & Research Director(Corporates) Salil Garg told PTI in New Delhi.

For every one per cent increase in gross domestic product, thepower generation need to increase by one per cent.

Otherwise, there would be inadequate electricity supply that canimpact not just the power sector but also other industries.

"The progress of reforms in the power sector is happening at aslow pace. The sector is expected to suffer this year (also) andinvestors are not likely to be enthused to put money into thesector," Garg noted.

Indian economy is projected to grow at a slower pace, in the range
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of 5.7-5.9 per cent, this fiscal.

India, which has an installed power generation capacity of over2,00,000 MW, expects to add about 88,000 MW in the currentFive-Year Plan ending March 2017.

The report '2013 Outlook: Indian Power', co-authored by Gargand released today, said that fuel risks -- coal and gas -- along with uncertainties about financial viability of distributioncompanies (discoms) remain major issues.

Huge tariff hikes -- required to revive discoms -- can't be expected

this year as many states have already increased them significantlyin recent times, Garg said.

Tamil Nadu has raised tariffs by as much as 27 per cent.

Acute fuel scarcity is already hurting power generation.

Coal India, the largest supplier to power plants, has not inked anyFuel Supply Agreements (FSAs) since FY 2009.

The report said: "The 114 FSAs for plants commissioned postFY09 and likely to be commissioned till FY15 have a totalcumulative capacity of 51,000 MW and with letters of assurancequantity of 216 million metric tonnes (mMT).

"Assuming only 65 per cent to be met through domestic coal, CoalIndia will have to increase its dispatch to the power sector to 436

mMT by FY15 (a Compound Annual Growth Rate of 12 per cent), which looks difficult."

The total investment required for 51,000 MW, including debt andequity, would be around Rs 2,75,000 crore (Rs 2,750 billion).


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With fuel risks, there is a possibility of debt portion -- of aroundRs 1,75,000 crore (Rs 1,750 billion) -- becoming non-performingassets for banks and financial institutions, Garg noted.

India Ratings said government's financial restructuring packagefor state-owned discoms is a positive step in the short term for theentire value chain of power sector.

"However, its long term benefits would depend on the ability ofdiscoms to lower Aggregate Technical and Commercial losses,hike tariffs and control operational costs such that the averagecost of supply decreases and average revenue increases," it noted.

Faced with mounting debts of discoms, which is over Rs 2.46 lakhcrore (Rs 2.46 trillion), the Power Ministry in October came up with financial restructuring plan.

Taking over of 50 per cent short term liabilities of discoms byrespective state government is a major proposal in the Centralgovernment plan.

"The package is voluntary and is currently being worked out bydiscoms in 10 states namely Rajasthan, Haryana, Uttar Pradesh,Tamil Nadu, Andhra Pradesh, Punjab, Karnataka, Jharkhand,Himachal Pradesh and Kerala," the report said.

India Ratings also noted that if the discoms are unable to achieveoperational efficiencies, the package would only have successfullydeferred the problems and not resolved them.

Meanwhile, the report said that merchant tariffs might rise due to"high deficits in energy and power, low Plant Load Factors (PLFs)for available capacities due to fuel shortages, low capacityaddition, high fuel prices and increasing percentage of importedcoal in overall coal supply".