Fitch says power sector outlook stable

Even though the availability of fuel continues to pose challenges for power producers, rating agency Fitch says the outlook for the industry is stable mainly on the back of some progress on the fuel availability issues and the possibility of debt restructuring of seven state power utilities (SEBs).

In a report on the domestic power sector, Fitch said "The outlook for the sector remains stable in view of some progress on the fuel availability issue and the possibility of debt restructuring of SEBs in seven states."

The optimism is based on the independent power producers' attempt at securing coal supplies for their new generation capacities and Coal India has agreed to enter into fuel-supply agreements with 48 new projects, albeit with a very low penalty for non-supply.

The report also notes positively the government effort to facilitate a solution with a higher penalty clause that will kick in for supplies lower than 65% of the contracted quantity from CIL.

"Though the resolution of the penalty issue in FSAs is likely in the near-term, coal supply issues will continue to affect investor interest in the sector," the rating agency said.

Similarly the government is in the advanced stages of formulating a plan for restructuring the debt of SEBs in Tamil Nadu, UP, Rajasthan, MP, Andhra, Haryana and Punjab.

"The proposed financial restructuring packages seek to shift 50% of the debt burden to the respective states, and also to postpone repayment of the principal amount by three years to allow loss-making utilities to achieve an operational and financial turnaround," the report said.

Besides this, the retail power tariff hike in some states (Tamil Nadu-37%, Delhi-26% and Punjab-12%) in the recent past is a positive sign, indicating the inevitability of passing on increased fuel costs to consumers, it said.

"The retail tariff hikes have helped the margins of SEBs and thus somewhat restored investor confidence. Fitch expects institutionalisation of the mechanism for passing on fuel costs on a regular-rather-than-ad-hoc-basis, with the introduction of fuel and power purchase cost adjustment on a monthly or quarterly basis in some states," it said.

However, the agency cautioned that delays in resolving the challenges in the current environment, including fuel availability and price risks, counterparty risks and regulatory risks, could lead to a change in the outlook to negative.