The plant load factor (PLF) of Indian coal-based power plants¹ will improve over 300 basis points (bps) to 62% (Chart 1 in annexure) this fiscal — the highest in the past five fiscals — fuelled by strong demand growth and limited capacity addition in the sector. This will help improve the credit risk profiles of one-third (25 GW) capacities of private generating companies (gencos) the most, with their operating profit expected to touch a five-year peak, a Crisil Ratings estimate shows.

Annual power demand recovered sharply last fiscal, rising 8.2% on-year, tracking the 8.7% growth in gross domestic product (GDP) as the pandemic impact eased. This fiscal, with GDP growth expected at 7.3%, power demand is likely to rise over 6%² on-year given the high correlation³ between GDP growth and power demand growth.

However, capacity addition remains low compared with demand growth. Coal gencos added just ~2% capacity⁴ annually in the past five years vis-à-vis annualised demand growth of 3.4% and may add 3.5% (~7 GW) this fiscal against demand growth of over 6%.

Says Manish Gupta, Senior Director, Crisil Ratings, “Private players are averse to adding coal-based capacities (none in the past five years) with an eye on renewable power. This aligns with the government’s plan to ramp up renewable generation⁵ to meet 50% of the cumulative demand by 2030⁶. However, renewable addition will meet barely a third of the incremental demand, in fiscal 2023, and the onus will be on coal gencos to fill the gap. This will power their PLFs to a five-year high of 62% this fiscal, building on their fortunes last fiscal.”

One-third of total private coal gencos⁷ are likely to benefit the most, given that more than 40% of available untied capacity is ready to cater to the rising demand either through sale on exchanges or through power purchase agreements (PPAs) on a bilateral basis. Their proximity to coal belts will ensure steady fuel availability, an issue that plagues most private coal gencos. Also, their variable cost of power generation, at less than Rs 3 per unit, is significantly lower compared with other private coal-based gencos, which will cushion their operating margins.

Says Ankit Hakhu, Director, Crisil Ratings, “Many distribution companies (discoms) had preferred buying merchant power instead of bilateral PPAs in the past due to low merchant tariffs. However, with the merchant power prices hitting all-time highs, reflecting the high global energy costs (Chart 2 in annexure), discoms have started shifting to short-term and medium-term PPAs in the past 12 months. This is likely to continue in the current fiscal as well. Further, with the central government recently barring some discoms from buying merchant power, the push to do more bilateral PPAs will increase further.”

Of the remaining two-third of private gencos, half of the capacities are in stress and may not operate much because of liquidity issues. The other half either have almost fully tied-up capacities or have a higher cost of generation (more than Rs 3 per unit), which will keep buyers away, as the gencos have limited room to reduce price and protect margins.

The credit profiles of central and state coal-based power gencos⁸ will remain stable as these capacities are largely tied up with a fixed return and cost pass-through tariff mechanism, with limited upside potential.

Crisil Ratings believes that its rated portfolio (~18.5 GW of coal-based private capacities out of the total 25 GW) will use strong operating profits and surplus cash balances to lower working capital borrowings or to prepay long-term borrowings, thus reducing the net debt to Ebitda ratio to 3.3 times this fiscal from 3.7 times in the last.

That said, the evolving global geopolitical situation impacting coal costs remains a key lookout.

¹ Cumulating to 204 gigawatt (GW) as on March 2022
² See Crisil Ratings press release, ‘Power demand to surge 6% for second straight year’ dated July 21, 2022
³ Correlation coefficient of 0.99 considering the long period of 34 years from fiscal 1986 till 2020
⁴ This capacity refers to the net capacity addition i.e. total addition minus retirals
⁵ Incudes solar, wind, biomass, hydro, small hydro and others
⁶ from 22% in fiscal 2022 (includes hydro)
⁷ Cumulating to 73 GW as on March 2022
⁸ Cumulating to 131 GW as on March 2022