High power prices to hit Indian utilities: Fitch

Fitch Ratings said in a report that significant increases in short-term power prices, especially those of peak load power, have started to affect the credit profiles of Indian power utilities. The distribution companies (DISCOMs), in deficit scenarios or otherwise, have sourced their peak demand power on the open market to achieve flexibility in power purchase operations.

Both the quantum and price of short-term power traded have exhibited a significant upward trend during the past two years. The spot price of short-term power contracts on India's two power exchanges has touched highs of Rs14 per kilowatt hour (Kwh) in recent months.

Fitch recognises that the upward trend in short-term power prices is a result of the increasing supply constraints prevailing in the power sector, as reflected in peak and base-load electricity shortages of 11.9% and 11.1%, respectively, during April 2008-March 2009.

"The reluctance of electricity regulators across different states to disallow higher expenditure on short-term power purchases has encouraged the utilities to bid aggressively for the purchases, driving rates even higher. Thus, the share of spot power cost in the total power purchase cost of power utilities is becoming disproportionate," says Salil Garg, Associate Director with Fitch's Energy & Utilities team.

Fitch notes that in the present policy scenario, where all power purchase costs are being considered as a legitimate pass-through in tariff fixation, the higher rates and quantum of power purchased from short-term sources outside the long-term PPA mechanisms directly increase the working capital requirements of these entities, which mean higher debt levels.

While the risk of the regulator disallowing the higher power purchase costs may be low, Fitch feels that the risk of a build-up of "regulatory assets" increases in the short-term when the regulator is reluctant to increase tariffs to match the increase in costs. With the expected build-up in regulatory assets, an increase in debt requirements of power distribution utilities may be inevitable, thus increasing the stress on their credit profile in the short-to-medium-term.