India’s power output to grow at 5-6.5% next financial year: Ind-Ra

Power generation in India is likely to grow at 5-6.5 per cent in the next financial year starting April, in line with India's GDP growth estimate, but fuel supply concerns continue to be a drag, India Ratings & Research (Ind-Ra) said on Thursday.

Assigning a stable to negative outlook to the power sector for 2014-15, Ind-Ra said that with higher availability of domestic coal and increased acceptability of imported coal, power generation in the country will increase in line with gross domestic output growth, which is estimated to be 5.6 per cent.

Besides, coal production would also increase due to faster progress on project clearances through coordination between the coal and environment ministries and closer monitoring of captive coal blocks.

In its power sector outlook for 2014, Ind-Ra, however, predicted that given that general elections are scheduled for mid-2014, many states could look at not hiking tariffs or reducing tariffs by increasing subsidy.

Delhi, Haryana and Maharashtra have already announced lowering of consumer tariffs. ''In the first half of the year it will be difficult to see increase in tariffs, but in the second half hikes could come into play,'' said Salil Garg, director – corporates at Ind-Ra.

While maintaining a stable outlook on its rated power sector entities for next year, the outlook reflects their continued ability to manage the issues associated with fuel and state power utilities (SPUs) due to a favourable tariff mechanism, their comfortable liquidity and support from the central and state governments.

Power generation could also improve on an easing of the liquidity situation of the state power utilities following the implementation of the financial restructuring package as it would lower back-down instructions and increase the ability to buy power.

At the same time, cautious bank-lending to state power producers and moderate demand from the manufacturing segment\ could lead to the energy deficit remaining at 4.5 per cent in FY15, after declining to 4.5 per cent in first eight months of FY14 (April to November) from 8.7 per cent in FY13.

Garg said the Central Electricity Regulatory Commission in its draft guidelines for 2014-2019 has changed the basis for calculating incentives and disincentives and this could impact the return on equity earned by thermal-based central generating stations.

However, positives with respect to water availability and operations and maintenance could partly mitigate the impact. As these are draft guidelines, a conclusive view will emerge post completion of the consultation process currently underway and the finalisation of guidelines.

Ind-Ra expects the sector to witness consolidation through asset buyouts by strategic investors. It would be driven by the government's initiatives to resolve key issues plaguing the sector. Depreciating rupee and the deleveraging plans of independent power producers have further fuelled investor interest.

Garg said highly leveraged corporates are trying to sell assets and some deals might go through. ''Besides Rs 50,000 crore investment likely in the two ultra mega power projects, any new investment would come only if there is coal block auction going forward,'' he said.

Average merchant prices for FY15 are likely to be at FY14 levels at an all-India basis. Prices in the southern power grid have fallen and could decline further post its inter-connection with the national grid during January 2014. Prices may increase intermittently during the pre-election period on account of strong buying interest from state power undertakings.