Modest demand, lack of PPAs, weak wherewithal limit capacity addition

Power demand clocked a compound annual growth rate (CAGR) of 3.8% over the last five years, riding on improvement in energy efficiency and reduction in transmission and distribution (T&D) losses, but also power cuts and load shedding due to the weak financial health of discoms and lack of intensive electrification.

Over the next five fiscals (2019 through 2023), however, CRISIL Research expects power demand to escalate to a CAGR of 6.5-6.8%. High latent demand, rapid urbanisation, and the government’s thrust on rural electrification will spur robust residential demand for power. Industrial demand, though, will grow at a moderate pace in line with growth in the gross domestic product (GDP) and gradual pick-up in economic activity.

Capacity additions in power generation are expected to slow down to 35 GW (excluding renewables) between fiscals 2019 and 2023, compared with 88 GW added over the past five years. Consequently, a large number of projects that are at a nascent stage are likely to get postponed until the demand situation improves significantly. Moreover, fresh project announcements are limited as players are opting for the inorganic route for expansion, as a number of assets are available at reasonable valuations.

The private sector will bear the brunt as large capacities of private sector projects under construction are stuck due to financial problems faced by promoters. Lenders are reluctant to extend further capital as the future of these projects is uncertain given the circumstances. Hence, a considerable number of under-construction capacities face a potential liquidation risk over the forecast period.