A Power Plant in Andhra Pradesh (Photographer; Prashanth Vishwanathan/Bloomberg)

Revival Of Power Distribution Companies Still Some Time Away

Notwithstanding a slew of measures taken by the government, the pace of recovery will be slow for India’s power sector, according to credit rating agency CRISIL in a report titled ‘Discom Losses To Halve By FY19 On Reforms’.

The government’s latest initiative, The Ujwal Discom Assurance Yojana (UDAY), which has already been adopted by 15 state power distribution companies (discoms) and one union territory, is expected to help bring down debt by 46 percent to Rs 21,000 crore by financial year 2019 from Rs 37,000 crore currently, according to the report. These 15 state discoms and the one union territory account for 65 percent or about Rs 2.7 lakh crore of the sector’s total debt.

This trend suggests that a rise in the number of new long-term power purchases agreements (PPAs) can be expected to rise only in financial year 2019, when discoms have a more sorted house and strive to meet the government's ‘Power for all' objective.

But loss-making power companies can take heart as demand is set to rise at compounded annual growth rate (CAGR) of 7 percent by fiscal year 2019 from 3.7 percent currently.

The overall improvement in the financial health of discoms and government’s focus on rural electrification is expected to spur demand, says the report.

Notably, power generation actually dipped 1.3 percent in the second quarter of this financial year, due to the good monsoons and an already strong base in the same period last year. This drop has also taken the total power generation growth in the first half of this fiscal to 5.2 percent.

But not all analysts are convinced about the forecast of a 7 percent annual growth rate.

The UDAY scheme is likely to have a gradual impact in improving the demand from discoms. There are certain initial operational issues being faced in the implementation of UDAY scheme which are expected to get cleared during the next few quarters. Also, with elections round the corner in certain states, the discoms in those states might not be in a position to take the desired tariff hikes which would impact the power demand from those discoms. In such a scenario, achieving even a 7% demand CAGR by FY19 from the discoms would be commendable.
Alok Deora, Associate Vice President-Research, IIFL