In a report released today, Fitch Ratings said the credit risk of power traders has become “risky” due to leverage and liquidity constraints faced by state-owned power utilities.
“If these facilities have liquidity problems that cause delays or defaults in their obligations to power traders, this in turn increases business risk for power traders.”
This can lead investors in power trading companies to either earn higher returns on investment or seek alternative avenues for investment.
Leading electricity traders include PTC India and Tata Power Trading Company.
According to estimates, over the past four years, the top five business licensees have controlled 80 percent of the market by volume.
Some of the major loss-making state power utilities come from the states of Tamil Nadu, Uttar Pradesh, Madhya Pradesh. It is also the largest buyer of short-term electricity through electricity traders, Fitch Ratings said “The financial health of state-owned power companies, the biggest buyers of electricity traders, worsened with an increase from Rs 70 billion (Rs 29,500 crore) to Rs 295 billion (Rs 29,500 crore) in the fiscal year. Countermeasures risk,” the report said.
According to the Planning Commission’s estimates, the electricity distribution deficit was Rs 70,000 crore in 2010-11.
According to Fitch, the largest short-term consumers – SPUs in Tamil Nadu and Rajasthan – face the biggest energy deficit with the largest cash losses based on revenue and subsidy receipts.
“Therefore, these states will remain net buyers in short-term electricity markets and continue to act as major partners for electricity traders. This adds significant risk to non-diversified electricity traders.”
The report points out that businesses with a strong equity base and high cash balances are better placed as they have a buffer to absorb any increase in the working capital cycle in case of delays or defaults by SPUs.
Salil Garg, head of Fitch’s Asia Pacific utilities team, said the agency expects large utilities to face lower business risk due to several factors, including economies of scale and a diverse customer base.
As a credible and reliable news source
