A 40-60% haircut, along with financial safeguards, can resolve as much as Rs 1 lakh crore of debt stuck in coalbasedpower projects and enhance their viability on a sustained basis. Lower debt and the consequentreduction in the cost of electricity generation will make these capacities attractive to new power purchaseagreements (PPAs).

The analysis is based on CRISIL’s assessment of 16,000 MW power assets, which account for nearly two-thirds of stressed and operational coal-based capacities.

Thermal coal-based power capacities have been in stress for multiple reasons. These include over-leverage due to costs over-runs, inadequate PPA and fuel supply agreements, and aggressive bids. While structural issues such as PPAs and fuel supply agreements may continue, debt haircuts can potentially improve cost of generation for these plants.

Moreover, for the assessed capacities, the haircuts are also supported by financial safeguards such as elongated repayment structure, lower interest rate, comfortable liquidity through debt service reserve accounts (DSRA), and adequate working capital limits for coal requirements. For some capacities, takeover by a financially strong and more-experienced management can ensure quicker turnaround.

Says Subodh Rai, Senior Director, CRISIL Ratings, ‘The haircuts and safeguards, if implemented, would ease debt servicing for these capacities and will, in turn, lower their cost of generation by ~30% to ~Rs.3.7 per unit for the next 5 years. That would be well below the current average cost of power procurement for state distribution companies (discoms).’

Lower cost of generation will also enhance the competitiveness of these capacities, making them amenable to new PPAs provided fuel supply remains adequate. Of the capacities CRISIL assessed, nearly 6000 MW did not have PPA. 

With power demand expected to grow at a healthy pace of around 6% over the next four years (5.5% in fiscal 2018), these capacities could benefit from potential new PPAs.

To put in perspective, the recently conducted pilot auction by the Power Finance Corporation for medium-term PPAs evinced response for 1,900 MW with lowest tariff of Rs 4.24 per unit. Lower tariffs of stressed assets can encourage state discoms to contract further PPAs to meet their growing demand.

These de-stressed capacities, offering low cost power, could prove to be a win-win proposition for the discoms.  To be sure, improvement in financial wherewithal of discoms to tie-in PPAs and assured coal availability to these power plants may still be a critical ask.