Rs 1.8 Tn Investment in Transmission Segment in India by 2025: ICRA

ICRA expects an investment of Rs 1.8 trillion by 2025 in the power transmission segment in India, driven by evacuation infrastructure for RE projects.

Independent investment information and credit rating agency ICRA has revealed in a new analysis that it expects an investment of Rs 1.8 trillion over the five-year period from FY2021 to FY2025 in the power transmission segment at all India level, 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 according to the report is towards augmenting the transmission infrastructure for evacuation of power generated by renewable energy projects.

Sabyasachi Majumdar, Group Head & Senior Vice President- Corporate ratings, ICRA, said “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 a 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.”

In the past five-year period, the power transmission segment of the Indian power sector has witnessed healthy growth with an average annual capex of ~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.

The analysis goes on to add that while the National Tariff Policy 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 citing certain exceptions.

As a result, the share of private sector in the transmission capacity remains low at 7 percent in transmission lines and 4 percent in sub-station capacity as of March 2020. Nonetheless, the share of private sector has been growing, with private players securing close to 75 percent 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 according to the analysis 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.

Girishkumar Kadam, Sector Head & Vice President – Corporate ratings, ICRA, adds, “Further, the lockdown restrictions during Q1 FY2021 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, the availability of relief under force majeure clause from the appropriate regulatory commission would be important for such projects.”

The lockdown induced by the 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 efficiency is 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 the POC framework.