Icra revises thermal power sector outlook to 'stable' on strong demand

Rating agency Icra has revised thermal power sector outlook to 'stable' from 'negative' due to strong demand growth and realisation of dues from discoms under LPS (late payment surcharge) scheme.

The Icra's outlook for the thermal power segment has been revised to stable from negative, supported by the healthy improvement in the thermal PLF (plant load factor or capacity utilisation) level in FY2023, which is likely to sustain in FY2024, coupled with the reduction in dues from state distribution utilities (discoms), an Icra statement said.

The PLF improvement is driven by the strong recovery in electricity demand growth in the country. A sustained growth in electricity demand is expected to improve the visibility on the signing of new power purchase agreements (PPAs) for the thermal IPPs (independent power producers), it stated.

Vikram V, Vice President & Sector Head - corporate ratings, Icra, said, "The all-India thermal PLF level is expected to improve from 58.9 per cent in FY2022 to 64.0 per cent in FY2023 and further to 65.5 per cent in FY2024, led by healthy demand growth and limited thermal capacity addition. The full-year demand growth for FY2023 is estimated at 9.5-10 per cent, which is likely to moderate in FY2024, though remaining healthy at 5.5-6.0 per cent."

Further, he stated that the power-generating companies are benefiting from the realisation of overdues from discoms under the late payment surcharge scheme notified by the power ministry in June 2022.

Dues from discoms have declined from Rs 1.3 trillion (Rs 1.3 lakh crore) as of May '22 to about Rs 0.6 trillion (Rs 60,000 crore) as on March 1, 2023, according to data from the PRAAPTI portal.

While this is a near-term positive for generation companies, a sustainable improvement in payments is linked to improving the financial profile of the discoms.

This remains a key monitorable from the outlook perspective for the thermal segment, he added.

The improved demand and higher tariffs in the short-term market have led to an improvement in profitability for thermal IPPs in 9M FY2023.

This is offset to some extent by the rise in open market coal prices. Also, the modest coal stock position remains a concern area for the sector.

While the coal stock level at power plants is witnessing a gradual improvement and was at ~12 days as on February 28, 2023, it remains half of the normative stock level of ~24 days.

Given the expectations of healthy demand growth in the summer season, the augmentation of coal supplies on a sustained basis remains important to ensure an uninterrupted power supply.

He stated,"The discoms in 17 out of the 28 states have filed tariff petitions for FY2024, indicating moderate progress. The median tariff hike proposed for FY2024 stands at 5.0 per cent against the 1.9 per cent median hike approved for FY2023."

Considering the upward pressure on the cost of supply amid the increased use of imported coal and higher tariffs in short-term tariffs and rising interest costs towards the loan availed under the LPS scheme, the cash gap per unit is likely to remain high at over 60 paise per unit for state-owned discoms at the all-India level in FY2023 and FY2024, he pointed out.

In this context, he said that timely issuance of tariff orders with adequate tariff hikes by the state electricity regulators remains important.

Icra's outlook for the power distribution segment remains negative. The progress in improving the operating efficiencies, realisation of dues from respective state governments and government bodies, and timely pass-through of cost variations to customers through regular tariff revisions are key to improving the financial position of the distribution utilities on a sustained basis, it stated.