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Coal shortages, low tariffs to trip power firms

Business

Shortage of coal supply and no provisions to pass on fuel costs to power tariff is likely to impact the debt of coal-based thermal projects, said a study conducted by Fitch Ratings.
The rating firm in its study said that power projects, which have no provisions to pass on fuel costs will face massive pressure from these rising costs, and would also result in severe shrinkage in margins.
"With the sector heading for a sizable coal shortage and the proposed coal rationing, many generators will be compelled to source costlier imported coal," the agency said in a report.
"The financial margins of power projects will come under severe pressure in the absence of a significant tariff revision or injection of additional sponsor equity. This will further stress the already fragile debt service coverage ratios," said Fitch global infrastructure group director, Venkataraman Rajaraman.
Dependence on imported coal as commodity prices rise, coupled with falling merchant power prices is likely to cause substantial deterioration in the credit quality of greenfield thermal power projects, which are under construction, the report said.
"This would likely cause a loss of potential investments in the sector, both debt and equity. The commercial banks have already started slowing down lending in the sector," Rajaraman said.
Projects that have substantial dependence on imported coal are most likely to default on their debt obligations over the short to medium term, if this trend persists, he said.
"This is worsened by the impact of the recent weakening of the Indian rupee against the USD," Rajaraman added.

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