Heatwave Risks to Indian Power Sector May Boost Renewable Energy Firms, Says Fitch Ratings

Fitch Ratings believes that despite recent heatwaves in India, the ratings of its portfolio of power-generation companies (gencos) are unlikely to be affected in the near term. However, the risk of higher power prices due to the additional need for cooling during heatwaves may weaken the financial position of power distribution companies (discoms) and hinder their ability to make timely payments. These dynamics may be credit positive for Fitch-rated renewable energy firms, which are able to sell extra production on power exchanges at higher prices due to the demand-supply gap. Fitch also believes that strong electricity demand should reduce curtailment risk.

The report highlights that the current high interest cost environment will constrain near-term growth opportunities for Indian renewable power generators. The government’s efforts to localise the renewable-power equipment supply chain, particularly for solar energy, have also raised costs. For example, tariffs of 40% on imported solar modules and 25% on imported solar cells came into effect in 2022.

Despite the challenges, Fitch believes renewable generators’ medium-term growth prospects remain robust, underpinned by the government’s goal of having half of the country’s installed electricity generation capacity coming from non-fossil fuels by 2030. Over the long term, maintaining stable power supply may be complicated if heatwaves result in more intense demand peaks, especially as solar and wind power, which tend to be more volatile, play a greater role in the generation mix. The risk of supply-demand gaps emerging may be mitigated through various means, including increasing investments in interstate power transmission systems, maintaining a substantial fossil-fuel baseload generating capacity, and increasing battery or pumped hydro-energy storage.