New Delhi: Poor financial health of state power boards could pose significant business risks to the country’s electricity traders, rating agency Fitch says.
In a report released today, Fitch Ratings said that the credit risk of electricity traders has become “risky” due to limited profits and liquidity.
“If these utilities have liquidity problems that lead to delays or defaults in their obligations to the electricity traders, it increases the business risk for the electricity traders,” it noted.
This can lead investors in power trading companies to seek higher returns on investment or find alternative ways to invest.
Leading power traders include PTC India and Tata Power Trading Company.
It is estimated that in the last four years, the top five trading licensees have controlled more than 80 percent of the market in terms of volume.
For states like Tamil Nadu, Uttar Pradesh, Madhya Pradesh, some of the big loss states come with utilities. Fitch Ratings says they are the biggest buyers of short-term electricity through power traders.
“Financial health of state power utilities, major customers of electricity traders, overall annual book loss of Rs 295 billion (Rs 29,500 crore) in FY 295 billion (Rs 29,500 crore) which has increased from FY 06 to 70 billion (Rs 7,000 crore) in FY06. Counterparty risk For growth, ”the report said.
According to the Planning Commission estimates, a total of Rs 70,000 crore was lost in power distribution in 2010-11.
According to Fitch, the largest short-term buyers – SPUs in Tamil Nadu and Rajasthan – face huge energy deficits with the most cash losses in terms of revenue and subsidies.
“Therefore, these states will remain net-buyers in the short-term electricity market and will continue to be the main competitors for the electricity traders. This significantly increases the risk for the uninterrupted power traders,” it added.
The report notes that traders with strong equity bases and high cash balances are in a better position because they have a buffer to absorb any increase in the working capital cycle in case of delay or default of SPUs.
Salil Gorg, director of Fitch’s Asia Pacific Utilities team, said the agency expects larger businesses to face fewer business risks for a number of reasons, including scale economies and a diverse customer base.