Mumbai: Maintaining stable outlook for the power sector for the second half of the year, India Ratings Monday said that higher fuel costs and weak financial profiles of power distribution companies could pose major challenges to the sector.
The agency expects the sector to get benefited from favourable tariff mechanism, comfortable liquidity and support from the central and state governments.
However, it noted that recent rupee depreciation will affect the cash flows of the power plants with limited or no pass-through of energy and capacity charges as part of tariff.
"Fuel costs and interest outgo will be higher for such independent power producers (IPPs) due to higher cost of imported coal and largely un-hedged foreign currency debt, respectively," it said.
Net financial leverage (net debt) could also increase due to higher debt and lower operating profits from higher fuel costs and sub-optimal plant load factors, the agency opined.
"However, few power sector entities can pass-through complete fuel cost and foreign exchange rate variation and have low levels of debt to insulate their profiles," it said.
According to the agency, gas-based generation cost is likely to increase by 49 percent to Rs 6.21 per unit due on account of the recent increase in domestic gas prices to USD 8.4 per mmbtu from USD 4.2, which will be applicable from April 2014.
"It will make gas-based power generation 76 percent expensive compared with a domestic coal-based plant. This would also increase off-take risks for such plants as they would move down in the merit order dispatch," it said.
The agency further opined that increase in gas costs, depreciating rupee and higher reliance on imported coal could result in higher off-take risk for power plants in case regular tariff hikes and monthly variable cost adjustments are not allowed by state electricity regulatory commissions.
The Central Electricity Regulatory Commission's recent decision allowing variable compensatory tariff will be positive for the credit profiles of the respective IPPs, it noted.