INDIAN POWER SECTOR

Outlook for thermal power sector

revised to Stable

FEBRUARY 2023
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Agenda

1 Executive Summary
2 Outlook
3 Electricity Demand & Generation

4 Capacity Addition, Coal Supply

and Short-term Tariffs 5 Discom Dues
6 Credit Rating Trends

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Executive summary
▪ ICRA’s outlook for thermal power segment has been revised to Stable from Negative, supported by
the healthy improvement in thermal PLF level in FY2023, which is likely to sustain in FY2024 and the
reduction in dues from state distribution utilities (discoms). The PLF improvement is driven by the
strong recovery in electricity demand growth in the country.

▪ The all-India thermal PLF level is expected to improve from 58.9% in FY2022 to 64.0% in FY2023
Click to Provide Feedback and further to 65.5% in FY2024, led by a healthy demand growth and limited thermal capacity
addition. The full-year demand growth for FY2023 is estimated at 9.5-10%, which is likely to moderate
in FY2024, though remaining healthy at 5.5-6.0%.
Sharp recovery in demand growth is
▪ A sustained growth in electricity demand is expected to improve the visibility on signing of new
leading to an improvement in PPAs for the thermal IPPs. This is evident from the recent medium-term (5-year) PPA tender for 4.5
utilisation of thermal assets and GW issued by PFC Consulting Ltd. This is a positive for thermal IPPs, as lack of PPAs remained one of
improving visibility on new PPAs the major concerns leading to large stressed capacity in the thermal power sector.
▪ The improved demand along with higher tariffs in the short-term market has led to an
Higher tariffs in short-term market,
improvement in profitability for thermal IPPs in FY2023 YTD. This is offset to some extent by the rise
time extension for complying with in coal prices (international & e-auction). Also, domestic coal-based projects are using imported coal
revised emission norms and realisation to mitigate the shortfall in supply from domestic linkage sources as per the directions from the
of overdues from discoms under LPS Ministry of Power. Timely pass-through of higher cost to discoms remains key in such a scenario.
scheme are positive developments for
▪ Discoms in several states are clearing the outstanding dues to the power generating companies
the thermal segment
through instalments of 12-48 months with funding support from the PFC and the REC, following the
notification of the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022 (LPS) by the
Ministry of Power. While this is a near-term positive for generation companies, a sustainable
improvement in payments is linked to improving the financial profile of the discoms. This remains a
key monitorable from the outlook perspective for the thermal segment.

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 Outlook

Outlook for thermal power segment revised to Stable

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Outlook revised to Stable for thermal power segment with improved PLFs driven
by healthy demand growth
Exhibit: All-India thermal PLF trends
Healthy growth in electricity demand (10.7% YTD) leading to
70.0% 63.6% 64.0% 65.5% higher demand for thermal power
60.7% 61.1% 58.9%
60.0% 56.0% 54.5% Improved visibility on new PPAs; 4.5 GW medium term PPA
50.0% tender notified by PFC based on requisition from discoms
40.0%
Higher prices in the short-term market; average tariff of Rs.
30.0% 5.9 per unit in 10M FY23 vs 4.4 in FY22 & LT avg of 3.5/unit
20.0%
Realisation of overdues from the discoms under the LPS
10.0% scheme
0.0%
FY2018 FY2019 FY2020 FY2021 FY2022 10M FY2023 FY2024 ▪ Elevated international coal prices; negative for imported
FY2023 (Est) (Est) coal-based units without fuel cost pass-through
▪ Supply side constraints in meeting domestic coal demand
Source: ICRA Research, Central Electricity Authority (CEA)

▪ The all-India average thermal PLF is expected to improve by 63.5-64.0% in FY2023 from 58.9% in FY2022, led by a strong growth in electricity demand. Further, the PLF
improvement is likely to sustain in FY2024, given the slower-than-expected capacity addition and expectation of a demand growth of 5.5%.
▪ A sustained demand growth is likely to improve the visibility on signing of new PPAs for the thermal IPPs. Also, the LPS scheme is a near-term positive for the thermal segment.
However, challenges remain due to weak financial position of the discoms and investment requirement to meet tighter emission norms. Also, any shortfall in supply of coal from
domestic sources would lead to use of costlier imported coal. Timely pass-through of higher cost to discoms would remain important in such a scenario.

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 Electricity Demand & Generation

Strong demand growth leading to improved generation from thermal segment

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Electricity demand growth remains strong in FY2023

Exhibit: All-India electricity demand trends & outlook

1800 12.0%
1600 10.0% 10M FY2021 1050 BU -3.4% YoY
1400
9.8% 8.0%
1200
Billion units

8.2%
1000 6.0%
800 6.2%
4.0% 10M FY2022 1142 BU 8.7% YoY
5.0% 5.5%
600
2.0%
400
200 1.3% -1.2% 0.0%
10M FY2023 1264 BU 10.7% YoY
0 -2.0%
FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024
(Estimated) (Estimated)
All India Energy Demand (LHS) % Demand Growth (RHS)

▪ The all-India electricity demand increased by 10.7% year-on-year (YoY) during the first 10 months of FY2023 (as per the provisional data from CEA) supported by
the sharp growth of 18.5% reported in Q1 FY2023 because of the severe heat wave in North and Central India, along with a low base effect owing to the impact
of the second Covid wave in Q1 FY2022. While the growth moderated to 5.8% in Q2 FY2023, it recovered to 7.3% in Q3 FY2023 supported by resilient economic
activity and demand for heating with the onset of winter season. The full-year demand growth for FY2023 is expected to remain healthy at ~9.5 - 10.0%. While
the electricity demand growth has typically trailed the GDP growth, it is higher than the estimated GDP growth of 7.0% for FY2023. For FY2024, the demand
growth is estimated to be in the range of 5.5-6.0% basis the growth prospects of the Indian economy.

Source: ICRA Research, Central Electricity Authority (CEA)

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Healthy growth in peak demand as well

Exhibit: Trends in all-India peak electricity demand

250 7.9% 9.0%

8.0%
6.7% Peak demand
200 6.3% 7.0%
6.0%
reached all-time
6.0%
150 high of 216 GW in
5.0%
GW

3.8% April 2022 against

3.5% 4.0%
100 2.8% 203 GW in FY2022
3.0%
& 190 GW in
50 2.0%
1.0%
FY2021
164 177 184 190 203 216 229
0 0.0%
FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 (E)

All India Peak Demand YoY Growth (%)

Source: ICRA Research, CEA

▪ The peak demand reached an all-time high of 216 GW in April 2022, against 203 GW in FY2022 and 190 GW in FY2021, led by the heat wave in northern and
central parts of the country. While the peak demand remained lower on a YoY basis in July’22 and August’22, it remained higher in the subsequent months. In
fact, the peak demand showed a healthy growth of 9-13% during Nov’22-Jan’23, led by resilient economic activity and winter demand for heating. The peak
demand is expected to increase to 225-230 GW in FY2024, with expectations of a sharp rise in demand during the summer season.

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Thermal generation reported a 9.4% growth in 10M FY2023 to meet the growing
demand
Exhibit: Source wise generation in 10M FY2023 vs 10M FY2022 Exhibit: Trends in electricity generation mix

1200 20.0% 100%

999 18.0% 12% 13% 16%
1000 913 28%
15.0% 80% 10% 10% 9%
Billion units

800 8%
9.4% 9.4% 10.0% 60%
600
5.0% 40% 75% 75%
400 -2.3% 72%
60%
146 134 167 142 0.0% 20%
200 38 39
0 -5.0% 0%
Thermal Hydro Nuclear Renewable FY2022 FY2023 (Est) FY2025 (Est) FY2030 (Est)
10M FY2023 10M FY2022 % Variation Thermal Hydro Nuclear Renewable

Source: ICRA Research, CEA

▪ The thermal power generation increased by 9.4% in 10M FY2023 over 10M FY2022, led by the sharp recovery in demand. Also, the generation from hydro segment
witnessed an improvement of 9.4%, while the nuclear power generation declined during this period. The generation from RE sources increased by 18.0% during this
period, led by the large capacity addition. The overall generation improved by 10.0% during this period.
▪ Based on the capacity estimates provided in the earlier section, the share of renewable energy-based generation is estimated to increase to 12.5% in FY2023, 13.8% in
FY2024 and further to ~16% by FY2025 from the level of 11.5% in FY2022. This would in turn reduce the share of thermal power generation to about 72% in FY2025
from 75% in FY2022. Over the ongoing decade, the share of thermal generation is expected to witness a gradual reduction to reach about 60% by FY2030 with the rising
share of RE. Nonetheless, it would continue to maintain a dominant share in the overall electricity generation.

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 Capacity Addition, Coal Supply and Short-term Tariffs

Limited capacity addition expected in thermal segment; coal stock level showing a gradual
improvement
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Limited capacity addition expected in the medium term from thermal segment

Exhibit: Annual capacity addition in thermal, hydro and RE segments

20000 18400

14077 14000
15000
11664
MW

10000 8619 8711

6765 7356
5782
4926 4485 4750
5000 2920
140 300 510 393 660 120 180 350
0
FY2019 FY2020 FY2021 FY2022 10M FY2023 FY2023 (E) FY2024 (E)

Thermal Hydro Renewable

Source: ICRA Research, CEA

▪ The capacity addition in the power sector is expected to be driven by the renewable energy segment, given the policy focus and the Government’s intent to increase the
share of renewable generation in the energy mix.
▪ The under-construction capacity in thermal segment stands by 28 GW as per the latest data from CEA, mainly driven by the Central and state generation companies.
There are no active projects under-construction by the private sector, with most of these projects stuck and no fresh investments. Nonetheless, some of these stressed
projects may get revived post acquisition by a stronger sponsor.
▪ The capacity addition in the current fiscal is likely to remain subdued at ~3 GW and show some improvement to ~5 GW. This along with the healthy demand growth is
likely to support the improvement in PLF level of thermal capacity over the medium-term.

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Coal stock levels showing a gradual improvement; stocking up before the onset
of summer season remains important
Exhibit: Fuel stock level (in no of days) for domestic coal-based plants at all-
Exhibit: All India coal production and supply to power sector
India level

800 16.0 15.0

16.0% 10.5%
700 14.0 12.1 12.1
600 12.0
9.4 9.6 9.2
500 10.0
Million MT

400 8.0
300 6.0
200 4.0
100 602 698 551 609 2.0
0 0.0
Coal Production Coal supply to power sector 31-Mar-21 31-Mar-22 30-Jun-22 30-Sep-22 31-Dec-22 11-Feb-23

10M FY2022 10M FY2023

Source: ICRA Research, CEA; Production data covers for CIL, SCCL and captive mines

▪ Domestic coal production by Coal India Limited (CIL), Singareni Collieries Company Ltd (SCCL) and captive mines increased by 16.0% in 10M FY2023 on a YoY
basis. While CIL’s production increased by 15.2% during this period, production by captive mines increased by 30.7%, thereby supporting a sharper growth in
all-India coal production.
▪ Production growth was driven by higher demand for coal from the power sector amid the sharp recovery in electricity demand and high international coal
prices. Supply to the power sector increased by 24.6% in FY2022 and 10.5% in 10M FY2023 on a YoY basis.
▪ The coal stock level at power plants is witnessing a gradual improvement, though remaining below the normative stock level of ~24 days. Stocking up coal
before the onset of summer demand remains important to avoid any loss of availability or higher dependence on imported coal.

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Coal imports to increase amid high international coal prices

Exhibit: Trends in Indonesian coal price index (HBA) Exhibit: Trends in coal imports by power utilities at all India level

350 308 305 80.0 150.0%

112.9%
300 70.0
250 281 60.0 100.0%

Million MT
USD/MT

200 50.0
150 40.0 50.0%
9.3% 12.3%
30.0
100 -14.6% -34.3% -40.6%
20.0 0.0%
50 10.0 56.4 61.7 69.2 45.5 27.0 42.0
0 0.0 -50.0%
Jul-20

Jul-21

Jul-22
May-20

Nov-20

May-21

Nov-21

May-22

Nov-22
Jan-20
Mar-20

Sep-20

Jan-21
Mar-21

Sep-21

Jan-22
Mar-22

Sep-22

Jan-23
FY2018 FY2019 FY2020 FY2021 FY2022 8M
FY2023

HBA (GCV-6322 Kcal/Kg) Coal Imports (LHS) % Growth (RHS)

Source: ICRA Research

Indonesia coal price index continues to remain elevated Coal imports to go up in FY2023
▪ The international coal prices have stayed elevated since the Russia-Ukraine ▪ Coal imports are expected to increase in FY2023 amid the recovery in
conflict in February 2022 and the uncertainty in coal prices is likely to electricity demand and the directive issued by the MoP to domestic coal-
persist till geopolitical tensions ease. based power plants to import and blend coal to offset any shortfall in
domestic coal supply. Timely pass-through of additional fuel cost to discoms
remains important in this scenario.

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Spot power tariffs show a sharp increase in FY2023 over historical trends

Exhibit: Trends in spot power tariff and volumes in day-ahead market and real-time market on Indian Energy Exchange

12.00 7000
10.00 6000
5000

Million Units
8.00
Rs/unit

4000
6.00
3000
4.00 2000
2.00 1000
0.00 0
Apr-21

Apr-22
Jul-21

Jul-22
Jun-21

Jun-22
May-21

Jan-22
Aug-21

Nov-21

Dec-21

May-22

Aug-22

Nov-22

Dec-22
Sep-21

Feb-22

Mar-22

Sep-22

Jan-23
Oct-21

Oct-22
DAM Volume (RHS) RTM Volume (RHS) DAM Price (LHS) RTM Price (LHS)

Source: ICRA Research, IEX; DAM: Day ahead market; RTM: Real time market

▪ The average spot power tariffs in the day-ahead market (DAM) of the Indian Energy Exchange (IEX) remained high in 10M FY2023 at Rs. 5.9 per unit against the
long-term historical average of Rs. 3.0 - 3.5 per unit and Rs. 4.4 seen in FY2022, owing to the sharp revival in electricity demand along with the supply-side
constraints arising from the high international coal prices impacting utilisation of imported coal-based units and the subdued domestic coal stock level.
▪ The prices have moderated gradually post Q1 FY2023 following the improved coal availability and higher supply from RE and hydro stations. While the average
spot tariffs fell below Rs. 4.0 per unit for the first time in FY2023 in Oct’22, it again increased to over Rs. 5.0 per unit in Dec ’22 and to over Rs. 6.0 per unit in
Jan’23 with the sharp increase in demand. The benefit of higher short-term tariffs is partially offset through higher coal prices (imported & e-auction coal).

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Key Policy Updates & Dues from Discoms

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Tender notified by PFC Consulting for a 4.5 GW medium-term PPA

Exhibit: Expected off-taker mix for the 4500 MW medium-term PPA tender ▪ PFC Consulting Limited (PCL), authorised by the Ministry of Power,
issued by PFC Consulting
Government of India to aggregate power on behalf of state distribution
Other states, utilities, has issued a request for selection (RfS) for procurement of 4500
590 MW MW for a period of five years through tariff-based competitive bidding, by
Gujarat, 1000 sourcing coal from allocated linkage under this bid through arrangement
MW
with Coal India Limited (CIL)/ Singareni Collieries Company Limited (SCCL).
▪ The power supply under the proposed PPA is scheduled to commence
Tamil Nadu, from April 2023, with the delivery point being the inter-connection of the
Maharashtra,
1500 MW project with the Central transmission network.
500 MW
▪ As seen in the exhibit here, discoms in five states have shown interest to
procure power through this bid to the extent of 3910 MW, with Tamil
Madhya Nadu leading the requirement at 1500 MW followed by Gujarat at 1000
New Delhi , Pradesh, 660 MW and the balance split between Madhya Pradesh, Maharashtra and
250 MW MW New Delhi. The tendered capacity at 4500 MW is higher considering the
Source: ICRA Research, CEA expected requirement from other states.
▪ The bid parameter under this tender would be the tariff quoted,
comprising fixed and variable charges. The variable charge component
The 4.5 GW medium-term PPA tender notified by PCL is a positive for would include the cost of fuel and transportation. The fixed charges shall
thermal IPPs that do not have long-term or medium-term PPAs. The lack be revised annually to reflect 20% of the variation in WPI. The variable
of PPAs remained a major concern for the thermal IPPs, leading to large charges will be linked to the coal price notified by CIL/SCCL and the
stressed capacity in the sector. A sustained demand growth is expected transportation charges notified by Indian Railways.
to improve the visibility on new PPAs for thermal IPPs.

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FGD installation deadline extended further by 24 months

▪ While it has been nearly seven years since the notification on

Exhibit: FGD implementation progress as on November 30, 2022
revised emission norms dated December 7, 2015 by the
Ministry of Environment & Forests and Climate Change
8780 4% (MoEF), Government of India, the overall progress in
FGD…
88690 46% complying with these norms has remained slow.
Bids awarded (MW)
▪ As on November 30, 2022, the bids for supply and installation
152007 78%
Tenders issued (MW) of the FGD system required to meet the SOx norms were
93% awarded only for 46% of the identified capacity, while the FGD
Feasibility study… 181822
system was commissioned only for 4% of the coal and lignite-
FGD planned (MW) 203686
based capacity.
0 30000 60000 90000 120000 150000 180000 210000 ▪ The timeline has been further extended by 24 months by the
MW MOEF vide its notification dated September 05, 2022,
providing relief to the thermal power plants, especially in the
private sector, given the challenges faced by these plants in
Exhibit: Revised timelines for FGD implementation’ securing funding and equipment to comply with the emission
Timeline norms. This was earlier extended by 2 years in March 2021.
Category Location/Area Non-retiring Retiring ▪ The amended rules notified in March 2021 had specified a
units units penalty mechanism for the first time, for the operation of non-
Within 10 km radius of national capital region (NCR) compliant thermal power plants beyond the revised timelines.
A Dec 31,2024 Dec 31,2024
or cities with 1 million plus population Considering a capital cost of Rs. 0.60-0.70 crore per MW
Within 10 km radius of critically towards FGD system, the total capital investment required for
B Dec 31,2025 Dec 31,2027
polluted areas or non-attainment cities FGD implementation by the identified capacity is estimated at
C All remaining units Dec 31,2026 Dec 31,2027 Rs. 1.0-1.2 lakh crore.
Source: ICRA research, CEA
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Funding secured from PFC & REC by discoms to clear overdues to gencos through
instalments under the LPS scheme
Exhibit: Funding sanction by PFC and REC to discoms to clear their overdues
Exhibit: Trends in dues from discoms to power generating companies
in installments
1400 1278
1153 1168
560 1200 1112
REC 985
138 1000 917

Rs. billion
800 701
468
PFC 600
144
400
0 100 200 300 400 500 600 200
Rs. Billion
Loans Sanctioned Loans disbursed 0
Mar-20 Mar-21 Sep-21 Dec-21 Mar-22 May-22 Feb-23
Source: ICRA Research, Loans disbursed as of December 2022; Q3 FY2023 results announced by PFC Source: ICRA Research, PRAAPTI Portal; Data for Feb-23 is as on February 21, 2023
and REC

▪ The Ministry of Power (MoP) on June 3, 2022 notified the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, with the objective of ensuring regular monthly
cash flows to generating companies and instilling payment discipline on discoms. The rules offer a one-time relaxation to discoms wherein the amount outstanding, including
principal and the late payment surcharge (LPS) on the date of notification of the scheme, will be frozen without further imposition of LPS and the same will be repaid by discoms
through monthly instalments of 12 to 48 months.
▪ The discoms in several states including Andhra Pradesh, Telangana, Karnataka, Jharkhand, J&K, Rajasthan and Madhya Pradesh etc have received sanctions from PFC and REC
aggregating to Rs. 1.0 trillion to clear the outstanding dues to the power generating companies through instalments of 12-48 months. This is enabling a reduction in the
receivable position for the power generating companies at all-India level, which had increased to Rs. 1.3 trillion as of May 2022 as per the data from PRAAPTI portal. While this is
a near-term positive for gencos, a sustainable improvement in payments can only be achieved by improving the financial profile of the discoms.

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Rating Trends in Thermal Power Segment

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Credit rating movement in ICRA-rated portfolio in thermal power segment

Exhibit: Rating distribution for ICRA-rated portfolio in thermal power sector Exhibit: Trends in rating upgrades and downgrades for power sector ratings

30% 28% 8 6.0

25% 22% 6 5.0
6 5
20% 17% 17% 5 4.0
4
15% 11% 4 3 3.0
10% 2 2 2 2 2.0
6% 2 1 1 1
5% 1.0
0%
0% 0 0.0
AAA AA A BBB BB B & below only ST FY2018 FY2019 FY2020 FY2021 FY2022 10M FY2023
ratings
Number of Upgrades (LHS) Number of Downgrades (LHS)
Upgrade/Downgrade ratio (RHS)

Source: ICRA Research

▪ The thermal power portfolio is spread across the rating categories, with the Central PSUs and thermal IPPs promoted by strong sponsor groups occupying the
AAA & AA categories followed by under-construction projects in the BBB category. The ratings in the BB category constitute entities facing challenges due to
lack of PPAs/cost overruns / payment delays among others.
▪ While the downgrades outpaced the upgrades till FY2020, the number of upgrades improved in FY2022 & FY2023 YTD led by recovery of overdues from
discoms with funding support under the Atmanirbhar package, improved demand scenario leading to higher off-take & tariffs and successful implementation of
debt restructuring for one thermal asset.

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Key rating actions in FY2023 YTD

Company Name Previous Rating Revised Rating Remarks

Significant improvement in the receivable and liquidity position of the

[ICRA]AA- (Stable) / [ICRA]AA (Stable) / company owing to clearance of past dues and timely inflow of current dues
Aravali Power Company Private Limited
[ICRA]A1+ [ICRA]A1+ from all the discoms. Timely progress on the FGD capex is another upgrade
factor.

Improved performance of the thermal power plant led by higher demand

and a sharp increase in tariffs in the short-term power trading market, which
R K M Powergen Private Limited [ICRA]B+ (Stable) [ICRA]BB (Stable) improved its credit metrics and liquidity position. Further, the signing of a
medium-term PPA has improved the company’s revenue and cash flow
visibility over the medium term

[ICRA]BBB+ (Stable) / [ICRA]BBB+ (Positive) / Improved revenue visibility with the signing of a new medium term PPA at a
Dhariwal Infrastructure Limited
[ICRA]A2 [ICRA]A2 remunerative tariff and reduction in debt

ICRA]BBB- (Negative) / ICRA]BB (Negative) / Inability of the company to pass-through the increase in the cost of natural
OPG Energy Private Limited
[ICRA]A3 [ICRA]A4 gas, through the tariff under its PPA with C&I customers

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Click to Provide Feedback

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 Analytical Contact Details

Sabyasachi Majumdar Girishkumar Kadam Vikram V

Senior Vice-President Senior Vice-President Vice-President

[email protected] [email protected] [email protected]

0124- 4545 304 022 – 6114 3441 040 – 4547 4829

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 Business Development/Media Contact Details

L. Shivakumar Jayanta Chatterjee Naznin Prodhani

Executive Vice-President Executive Vice-President Head Media & Communications

[email protected] [email protected] [email protected]

022- 6114 3406 080 – 4332 6401 0124 – 4545 860

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Thank You!

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