India Ratings and Research (Ind-Ra) opines that the operating performance of thermal power plants could improve meaningfully, given the change in the incremental demand supply equation after a decade. The incremental demand is likely to outstrip the incremental capacity addition. This lowering of supply is driven by i) the limited capacity addition of thermal power plants, ii) the retirals/phasing out of old capacities largely from the state sector, and iii) the slowdown in renewable capacity addition.
The demand side is likely to remain robust on account of a pickup in the industrial activity, early signs of capex revivals, given the strong balance sheet position of corporate India, and pick-up in exports. This is likely to translate into higher plant load factors (PLFs) beginning FY22 which have continued to fall since FY11.
Ind-Ra expects a pick-up in PLF of plants which are placed lower in the merit order, followed by others. 4QFY21 was a precursor of the way operating performance of plants could rise. The biggest beneficiaries of the upward swing in generation would be the players with open merchant capacity and good merit order positioning, followed by regulated plants. Though regulated plants tend to get their fixed cost recovery basis plant availability, a higher PLF would result in better operating parameters leading to energy savings, and a higher PAF would result in capacity incentives.
The supply-side addition on the power sector has been constrained, with the thermal energy capacity additions declining to below 5GW in FY21 (over FY19-FY21: INR5.8GW) from the high of 16.8GW average over FY12-FY18. Renewable energy capacity addition has also slowed down considerably to 7.4GW in FY21 from the peak addition of 11.8GW in FY18. Ind-Ra does not expect a meaningful pick-up in the renewable energy capacity addition because i) players' stretched balance sheet, given inability to deal with counterparty risks, ii) high exposure to select states, iii) an unfavourable mix of solar and wind portfolio, iv) inability to procure land in a timely fashion, and v) high under construction to operational project mix creating strain on balance sheet and cash flows.
Ind-Ra expects the sector to see consolidation before reviving its growth trajectory. The biggest swing factors in Ind-Ra’s supply equation could be nuclear energy capacity addition as India has embarked on an ambitious project to increase the nuclear capacity by 4.1GW by FY25. Moreover, the government is looking to add 9GW of additional nuclear capacity through fleet mode and light water reactor technology. Given nuclear plants have the must-run status, a lower capacity addition than that assumed by Ind-Ra could swing the PLFs further higher.
Additionally, though the renewable energy capacity addition would outpace thermal, effective capacity addition remains low in renewables due to lower PLFs. Furthermore, the planned decommissioning of aged state capacities would lead to lowering down of the net capacity addition.
Ind-Ra projects a strong power demand recovery for 10%-12% yoy in FY22, with sustained demand growth of 6%-6.5% yoy for FY23 and FY24. The agency believes that the surge in the power demand from January 2021 is likely to sustain, given the continued high industrial demand even during the second covid wave along with opening up of most states from June 2021.
The industrial demand is also supported by Ind-Ra's rising merchandise exports especially in power-intensive industries and expected GDP growth of 10.1% yoy. The exports momentum continued during April and May 2021, both up 12% yoy. However, the lack of coal availability and weak discom financial health could be the biggest risks for demand as discoms could resort to power outages or enough coal might not be available to meet the demand.
The recent disbursals under the Atamnirbhar package totalling Rs 755 billion have provided a breathing space to discoms, though a lasting solution to the problem is still to be found. Lastly, coal availability might not be an issue, given the adequate coal output and inventory levels at plants.
