In a report released today, Fitch Ratings said energy traders’ credit risk has become “riskier” because of the profitability and liquidity constraints facing state energy companies.
“If these utilities have liquidity problems that lead to delays or defaults in their obligation to energy traders, this in turn increases business risk for energy traders,” it noted.
This can lead to investors in energy trading companies either seeking higher returns on investment or seeking alternative investment opportunities.
Leading energy traders include and Tata Power Trading Company.
According to estimates, the five largest trading licensees have controlled more than 80 percent of the market in terms of volumes in the past four years.
Some of the major loss-making state energy companies come from the states of Tamil Nadu, Uttar Pradesh and Madhya Pradesh. These are also the largest buyers of short-term electricity through energy traders, according to Fitch Ratings.
“The financial health of state energy companies, the main customers of energy traders, has deteriorated, with total annual book losses increasing to Rs 295 billion (Rs 29,500 crore) in FY 10, from Rs 70 billion (Rs 7,000 crore) in FY 06, leading to an increase in counterparty risk,” the report said.
According to Planning Commission estimates, losses in electricity distribution in 2010-11 amounted to a staggering Rs 70,000 crore.
According to Fitch, the largest short-term buyers – SPUs in Tamil Nadu and Rajasthan – face massive energy shortages with the largest cash losses based on revenue and realized subsidies.
“Therefore, these states will continue to be net buyers in the short-term energy markets and continue to act as key counterparties for energy traders. This significantly increases the risk for non-diversified energy traders,” it added.
The report pointed out that traders with strong equity and high cash balances are better positioned because they have the buffer to absorb any increase in the working capital cycle in the event of delays or defaults by SPUs.
Salil Garg, director of Fitch’s Asia Pacific Utilities team, said the agency expects larger traders to experience low business risk due to many factors, including economies of scale and a diversified customer base.
This post Discoms’ poor financial health poses risks to energy traders: Fitch was original published at “https://economictimes.indiatimes.com/markets/stocks/news/discoms-poor-financial-health-poses-risks-for-power-traders-fitch/articleshow/10430186.cms”