Rating agency ICRA expects an investment of Rs 1.8 trillion over the five-year period from FY21 to FY25 in the power transmission segment at the all-India level.
This investment will be driven by evacuation infrastructure for renewable energy (RE) projects. In line with the shift in policy focus from conventional sources (coal and gas) to renewable power sources (wind and solar), the focus of the transmission segment is towards augmenting the transmission infrastructure for evacuation of power generated by renewable energy projects, notes ICRA.
In the past five-year period, India’s power transmission segment has witnessed a healthy average annual capex of around Rs.500 billion.
Commenting on the investment prospects, Sabyasachi Majumdar, Group Head & Senior Vice President – Corporate ratings, ICRA, says, “The Government of India has lined up 14 transmission projects under the tariff-based competitive bidding (TBCB) route for developing transmission infrastructure for evacuating power from 25 GW renewable power projects and another six projects in the intra-state segment, providing healthy pipeline for private sector players. While there is likely to be a slowdown in electricity demand and investments in the sector in FY2021 amid the Covid-19 induced disruption, the same are likely to recover from FY2022 onwards.”
Despite the mandatory TBCB, many projects continue to be awarded to PGCIL and state utilities, notes ICRA.
In the past five-year period, power transmission segment of the Indian power sector has witnessed a healthy growth with average annual capex of around Rs.500 billion, in line with the significant growth seen in the installed power generation capacity. The investments in the power transmission segment have been led by the Power Grid Corporation of India Limited (PGCIL) and by the state transmission utilities, followed by the private sector.
While the National Tariff Policy (NTP) mandates that transmission projects must be awarded through the competitive bidding route, many projects continue to be awarded to PGCIL and the state transmission utilities under the regulated tariff mechanism (RTM) citing certain exceptions.
The share of private sector in upcoming power transmission projects is increasing.
As a result, the share of private sector in the transmission capacity remains low at 7 per cent in transmission lines and 4 per cent in substation capacity as of March 2020. Nonetheless, the share of private sector has been growing, with private players securing close to 75 per cent of the projects awarded under the TBCB route so far. While PGCIL and state transmission utilities are likely to remain as the major players in the power transmission segment, the share of private sector is expected to witness a healthy growth over the next four to five years.
The key challenge for the winning bidders under the TBCB route has been the delays in execution, mainly because of delays in securing right of way, forest clearances and re-routing requirements in some cases.This in turn results in cost overruns, thereby putting pressure on the return and debt coverage metrics for the developers. The median delay for projects awarded under the TBCB route has been about 8.5 months. As a result, the credit risk profile for transmission projects remains relatively high during the project phase, with exposure to delays in execution because of delays in securing right of way and forest clearances, and consequent cost over-run risk.
The key challenge for winners of TBCB projects is to contend with pre-project delays like securing right-of-way.
Girishkumar Kadam, Sector Head & Vice President – Corporate Ratings, ICRA, adds, “Further, the lockdown restrictions during Q1FY2021 and consequent constraints in terms of labor availability is likely to result into delays by 3-5 months for under-implementation transmission projects, leading to cost overrun for such projects. As a result, availability of relief under force majeure clause from the appropriate regulatory commission would be important for such projects. Based on ICRA’s analysis of a sample set of TBCB projects, it is estimated that a 5 per cent escalation in capital cost for an independent power transmission project (IPTP) is estimated to lower the project IRR by 50-80 bps and the cumulative debt service coverage ratio is estimated to decline by 5-9 bps. However, such IPTPs once operational, their credit profile improves significantly, given the low operating risk, stability of revenue linked to line availability and limited counter-party credit riskfor inter-state transmission projects, with billing and collections handled by the central transmission utility (CTU) under point of connection (POC) framework.”
COVID-19 Impact
The lockdown induced by Covid-19 pandemic since March 2020 led to an adverse impact on the finances of distribution utilities, leading to delays in payments to power generating and transmission companies. Nonetheless, the collection efficiencyis witnessing a gradual improvement for the inter-state power transmission projects over the last four-month period. ICRA expects the credit profile of the inter-state power transmission projects to remain stable supported by stability in revenue profile, low operating risk and limited counter-party credit risk, backed by POC framework.
