Independent power producers; trends & outlook

Here we come out with its report on independent power producers (IPPs). The rating agency has observed that about 60% of the thermal capacity under execution by private IPPs is based on domestic coal which remains exposed to fuel supply risks because domestic coal shortages are expected to increase significantly over the long term.

The pace of overall capacity addition in the power sector has shown an improvement during the current Plan Period (2007-12) as reflected in the commissioning of 34,461 MW till March’11 which is significantly better than what was achieved in previous plan periods. Based on the current progress, ICRA expects the achievement of overall capacity addition to reach close to 50,000 MW by end March 2012. There has also been a change in the ownership mix of capacities being created with the share of private sector IPPs in the capacity addition during the current Plan Period having increased to 32% (as against less than 10% in the previous Plan Periods). However, despite the improvement, this will result in a slippage w.r.t the target of 78,000 MW set by Government of India (GoI) for the current Plan Period. The shortfall in capacity addition targets has resulted in energy deficits remaining high, with the peak energy deficits remaining high at about 10 % in FY 2011.

Given the existing deficit situation, and likelihood of continued growth in energy requirements, the Indian power sector will require significant incremental capacity addition in the next Plan Period (until March 2017). This requirement amounts to around 130,000 MW assuming energy demand at 7.5 % per annum, testifying to the positive demand outlook for the power generation sector. ICRA also expects that the share of private sector in the total capacity addition increase even further given the large projects being undertaken by various groups.

Notwithstanding the positive demand outlook, ICRA notes that the risk profile of private IPPs have increased appreciably over the last one year period. These include:

Vastly increased fuel supply risks: ICRA observes that about 60% of the thermal capacity under execution by private IPPs is based on domestic coal which remains exposed to fuel supply risks because domestic coal shortages are expected to increase significantly over the long term. This is due to a) CIL’s incremental output likely to fall significantly short of the incremental demand, b) overall progress in development of captive coal blocks allotted to both government & private sector companies remaining extremely slow, and c) increased uncertainty on future coal availability due to new initiative by Ministry of Environment & Forest (MoEF) taken during FY 2011 for notifying ‘Go and No Go’ blocks in which 105 coal blocks are notified as ‘No-Go’ blocks having high forest cover where mining will not be allowed. Further with the recent amendment (dated June 2011) in the linkage guidelines for supply of coal during XII Plan Period whereby the actual supply of coal will be subject to 85% of power being tied up through long term competitively bid tariff based PPAs with distribution utilities, the merchant power projects remain the worst affected.

The Government of India had planned a capacity addition of 78,000 MW during the XI Plan Period. However as against this, the actual capacity addition in the four-year period till end of March 2011 remained muted at 34,461 MW- although this is a significant improvement over what has been achieved previously (the maximum achieved in any plan period was 21,180 MW during the X Plan Period). Of this capacity, about 85% was thermal based, 12% hydro based and the balance nuclear. Kindly refer Chart I which illustrates the mix of capacity addition by central, state and private sector during XI Plan Period as on March 2011. Based on the current progress, ICRA expects cumulative capacity addition of about 50,000 MW by March 2012. Another noteworthy feature is that the share of private sector in the capacity addition has significantly improved to 32%, as against 9% in the previous plan period (FY 2003-2007). With capacity additions having shown a significant slippage w.r.t. targets, this has led to continued power deficit levels. During FY 2011 peak deficit & energy deficit in India stood at 9.8% and 8.5% respectively, as against that of 15.4% and 11.6% respectively for FY 2009-10.