Healthy cash accrual and deleveraged balance sheet will support credit profiles
Strong addition of renewable energy (RE)1 capacities will pull down the share of coal-based (thermal) plants in power generation by over 500 basis points (bps) to ~67% by next fiscal after rising continuously in the past five through fiscal 2024. Yet the plant load factor (PLF) of thermal plants will remain healthy because of limited capacity addition.
Healthy PLFs and moderating cost pressures due to robust domestic coal supply will support operating cash flows, which, along with reduced debt levels, will result in comfortable credit profiles for thermal players.
The share of thermal power in overall power generation had increased to 73% in fiscal 2024 from ~69% in fiscal 2020. This was mainly because the growth in demand (at ~7% during fiscals 2021-2024) was being met largely by thermal generation. RE and other sources (nuclear, hydel, biomass) clocked just ~3% compound annual growth rate during this period.
Says Manish Gupta, Senior Director, CRISIL Ratings, "The trend is set to reverse with the share of thermal expected to fall over 500 bps to ~67% by fiscal 2026. For the first time, we would see incremental RE generation growth (at 20%) will be higher than the overall power demand growth of 5-6% over fiscal 2025 and 2026. This is because a strong government push has led to a significant step-up in RE capacity addition of more than 50 GW in the next two years by fiscal 2026, which, although operating at relatively lower PLFs, will outpace thermal generation growth over the period."
The PLFs of existing thermal plants will see a marginal fall but will remain healthy at more than 65% by fiscal 2026 compared with 69% last fiscal. This is because, thermal power is needed to meet almost half of the incremental annual power demand over near to medium term. This, along with limited capacity addition, will lead to continued dependence on the existing thermal capacities. Furthermore, thermal power will remain important for meeting the base load requirements due to the intermittent nature of RE capacity and absence of sustainable storage solutions.
Additionally, despite the marginal fall in PLF, the business risk profile of thermal players will still be comfortable, highlights our study of ~33 GW of private coal-based capacities rated by CRISIL Ratings.
Around half of these capacities are under a tariff model which ensures full recovery of fixed costs, such as operational and maintenance expense, interest on loan, depreciation as well as a fixed return on equity, so long as the plant is available to operate above required normative levels. This is not expected to be a challenge because domestic coal supply, which is the key parameter for maintaining the required availability, is conducive. We believe domestic coal production, which meets over 92% of the demand from the power sector (rest is via imports), will be sufficient for domestic power requirements2. Also, in this tariff model the variable cost (primarily the cost of coal) is a passthrough.
For the remaining capacities, the impact on operating cash flows3 from lower PLFs will be marginal. This is because the decline is expected to be small and cost pressures are easing owing to coal getting cheaper4. Additionally, inventory levels are better and domestic coal supply is improving, all of which will provide a cushion to earnings.
Says Ankit Hakhu, Director, CRISIL Ratings, "While the impact of reduction in PLFs on the business profiles of thermal players is expected to be limited, these companies have positioned themselves well by materially reducing debt - down 25% over fiscals 2021 to 2024 - and have healthy cash flows and support from government-driven schemes for the power sector such as LPS and Aatmanirbhar. Debt levels are expected to remain in check with limited capex requirements for these plants, supporting the credit profiles of the players."
The estimates remain sensitive to prolonged monsoon, which could impact coal availability to the power sector. Further timely payment by counterparties also remains a monitorable. |
