Massive blackouts could tarnish India's creditworthiness

Widespread outages will have short-term and long-term credit repercussions, says Moody's.

In the near term, there will be a minimal adverse impact on the credit quality of rated issuers. But Moody's new report warned that mid- to longer-term implications could be more serious if the government fails to respond to the structural challenges facing the power sector.

Here's more from Moody's:

Disruptions of unprecedented scale. On July 30 and 31, 2012, widespread power outages affected nearly 700 million people in the northern part of India, representing roughly 60% of the nation’s population. The scale of the blackouts was unprecedented and led to widespread disruptions to mass transit and industry.

Only a modest, short-lived financial impact from the blackouts. The affected utilities lost one or two days of revenue and incurred higher operating expenses as a result of increased staffing and reporting requirements, but the additional expense is not material. Given cost-plus regimes and fixed capacity payments, the impact on NTPC Limited (Baa3 stable) and Tata Power Company (TPC, Ba3 review for downgrade) is nominal.

Minimal near-term credit implications for rated issuers, but more serious over the long term. The outages pose minimal near-term risk to the creditworthiness of our two rated issuers, NTPC and TPC, but long-term implications for the power sector could be negative and will depend ultimately upon the type of government response.

Required investment from state-owned utilities may be significant, but manageable for NTPC. We anticipate a ramp-up in financing costs for the sector as government-owned utilities increase their debt-funded capital expenditure (capex) in an effort to meet significant demand and ultimately avert future power disruptions. However, NTPC has headroom to take on more debt at its current rating level.

Regulatory clarity may prompt more robust private investment. Government policies to boost private-sector investment could start by clarifying the fuel-cost pass-through allowed for power projects using imported coal. Greater regulatory clarity would be credit positive for TPC, which relies on imported coal for its 4,000 megawatt (MW) project in Gujarat.

A potential silver lining. The recent outage presents an opportunity for politicians, regulators, utilities, and consumers to engage and seek sector reform, thereby improving the availability and reliability of electricity. As the structural challenges of the power sector affect each step of the value chain, meaningful improvement will take time and focus.