Slower demand growth to hit power generators: CRISIL

Returns on competitively bid power generation projects will be under pressure on account of slowing power demand growth and aggressive bidding.

Acording to CRISIL Research, over the 12th five-year plan (2012-13 to 2016-17), power demand growth is expected to be tepid at 6.2 per cent due to slowing demand growth from the industrial and commercial segments on account of muted GDP growth.

This is despite significant latent demand, translating to a healthy 10 per cent CAGR for the domestic segment, and strong substitution demand, arising on account of a gradual shift to grid power from diesel-based generation. 

In the Eleventh Five Year Plan (2007-08 to 2011-12) the power demand to GDP growth ratio was 0.83. In the 12th plan, this ratio is expected to improve to 0.9, based on our demand growth expectations of 6.2 per cent.

At the same time, power generation capacities are expected to grow at a faster pace of about 7 per cent CAGR, with 68 GW of capacity additions. Consequently, for the first time in many decades, adequate generation capacities will be available. 

Says Prasad Koparkar, senior director, industry and customised research, ''In the past, demand growth has been restricted due to lack of generation capacities and constrained power off-take from state distribution companies on account of their weak financial position. However, in future, slow economic activity will restrict demand growth, despite an improvement in the financial position of state distribution companies with tariff increases and significant reduction in interest costs on  implementation of the financial restructuring plan. ''     

Due to relatively slower demand growth, the overall plant load factors (PLFs) of coal-based plants are expected to be about 70-74 per cent in the 12th Plan compared to the highs of 77-79 per cent seen during 2008 to 2010.

However, CRISIL Research believes that the PLF of new domestic coal-based plants will remain significantly lower, increasing only to 65-67 per cent by 2016-17. This is due to slower demand growth and aggressive bidding, which will restrict the use of high-cost imported coal.

According to Rahul Prithiani, director, industry research, ''Lower PLFs will adversely impact returns for 18 GW of competitively bid plants that have levelised tariffs of less than Rs. 3.1 per unit – a level needed to earn 15 - 16 per cent return on equity. Of this, close to 7 GW, which have been aggressively bid at levelised tariffs of below Rs.2.9 per unit, are at high risk of being unviable.''