Debt of coal-based thermal projects may be impacted by the impending coal shortage, particularly if off-take arrangements do not envisage a pass-through of fuel costs to the power tariff.
In a special report, Fitch Ratings says that such projects will have to resort to more expensive imported coal that is expected to be blended in various degrees depending upon the plant configuration.
"The financial margins of power projects will also come under severe pressure in the absence of a significant tariff revision or injection of additional sponsor equity," says Venkataraman Rajaraman, director at Fitch's Global Infrastructure Group. "This will further stress the already fragile debt service coverage ratios," Rajaraman.
"Projects that have substantial dependence on imported coal are most likely to default on their debt obligations over the short to medium term, if this trend persists. This is worsened by the impact of the recent weakening of the Indian rupee against the dollar", adds Rajaraman.
In the report, Fitch has computed the likely cost of power generation under four simulated scenarios involving varying degrees of costlier imported coal and accordingly projected the debt service coverage ratios.
For example, even with a favourable set of assumptions, it costs Rs4.41 / kwh (excluding return on equity) for a plant that is fully dependent on imported coal, which is significantly higher than the average merchant tariff of around Rs3.75 / kwh to Rs4.00 / kwh.
It is likely that such projects face an impending risk of default.
Details of the scenarios covered and the likely cost of generation can be found in the report, "Power Projects Facing Significant Fuel Risks."