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Moody's Investors Service and its Indian affiliate, ICRA Limited, say that their stable outlook for the power sector in India (rated Baa3 positive by Moody's) over the next 12-18 months reflects sustained improvement in domestic coal availability, as well as the Indian government's policy initiatives, which will likely lead to improvements in the financial position of state-owned electricity distribution companies in the next two to three years.
"In fact, we changed the outlook for the Indian power sector to stable from negative, because the increased domestic production of coal will ease constraints on fuel supply," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst.
Moody's also says that the Indian government's debt restructuring of the financially weak distribution utilities — under the Ujwal Discom Assurance Yojana (UDAY) implemented by 17 states so far — will likely improve the companies' financial capacity to make timely payments to power generators.
"These distribution utilities will also benefit from the lower cost of power purchases, due to improved domestic coal availability, the subdued tariff level of short-term traded power, and flexibility provided by the government to generating companies for the optimal utilization of coal," says Sabyasachi Majumdar, an ICRA Senior Vice President.
ICRA points out that an improvement in domestic coal availability has substantially mitigated coal supply risk and the risk of under-recovery in fuel costs — due to a reliance on costlier coal imports — for thermal independent power producers (IPPs).
ICRA also says that the improving financial profile of distribution utilities — which are key off-takers — will benefit IPPs through a reduction in the receivable cycle, and a modest improvement in the plant load factor over the next 18 months.
In addition, ICRA notes the uncertainty as to the timing of tariff compensations for affected thermal IPPs, given that the relevant authorities have yet to decide on the timing of such compensations for imported coal-based projects affected by changes in regulations in Indonesia (Baa3 stable).
Moody's says that renewable generation could act as a complementary source of power, rather than a competitor to thermal energy.
