Less dependence on imported coal credit positive for IPPs

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26 Aug, 2025 12:21

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Decline in power producers' consumption of costly imported coal in India is a key credit positive for them as well as the entire sector, Moody's Investors Service said today. The power sector however continues to face "persistent challenges, including uneven gas supplies, cost over-runs at some generating plants, and limited off-take demand for their electricity from financially weak distribution utilities," Moody's Vice President and senior analyst Abhishek Tyagi said. Some IPPs are also locked into power purchase agreements (PPAs) that have become inviable because they do not allow rising fuel costs to be passed through, he said.

"All of these factors will continue to weigh on the sector's credit profile," he said in a statement. Coal India, which accounts for 80 percent of domestic coal output, raised its production by 7 percent in the financial year ending March 31 2015, and by a further 9.4 percent in the first five months of the current financial year. Output rose after the government initiated a process of auctions and allotments for coal mines.

"The increase, if sustained, will be a key positive for IPPs, as it will reduce their dependence on costlier imported coal and improve their financial profiles," Tyagi said. The report further said that, assuming a compound annual growth rate of 7 percent in domestic output, the power generators' dependence on imports would fall to 8 percent by 2019-20 from 25 percent currently, reversing the sharp rise in the sector's dependence on imports between 2011 and 2015. However, if domestic output grows at a more moderate 4 percent between 2015-16 and 2019-20, and if the ramp-up in production from the allocated mines is delayed by one year, the decline in import dependence will likely stall to 18 percent by 2019-20.

With the power sector's other challenges, Moody's is of view that the financial weakness of the state-owned distribution utilities has constrained their ability to enter into long-term PPAs with the generators. This scarcity of long-term PPAs has in turn undermined the IPPs' ability to secure binding fuel supply agreements for cheap domestic coal, as generators backed by long-term PPAs are given preferential access to such supply arrangements. In this context, Moody's said that improving the financial profile will require consistent tariff revisions and reductions in distribution leakages.

In addition, the IPPs themselves also face other headwinds which include PPAs that have become inviable due to rising fuel costs, uneven gas supplies, and average cost over-runs of 35 percent for many generating plants under construction.