Which part of power bucket will see highest earnings growth in next 10 years? Fitch Ratings’ Girish Madan answers

Girish Madan, Director, Fitch Ratings, says it would be a combination of both thermal and renewable generation sides. In renewables, wWe have seen some pressure on the earnings because tariffs were coming down as competitive intensity was increasing in the sector, but of late the profitability should increase because some of the variables have turned in favour of the Gencos. Some of the commodity prices have also come down. Plus, there has been a 20-30% correction in solar module prices. All these factors could lead to enhanced EBITDA generation as well as profitability for Gencos.

Where exactly in the power basket are we seeing the highest amount of activity in terms of addition of capacities?
Girish Madan: Over the last few years, we have seen a large part of capacity addition has happened in the renewable space. If we talk about the last two years, around 40 gigawatts have been added in India and 80% of that has gone into solar and wind capacities, mainly solar capacities, so that is where we have seen capacity addition happening. We have seen some volatilities as far as the demand was concerned before COVID, so there was a slowdown in capacity addition. But sustained demand over the last three years has led to a great increase in capacity addition.

Going forward, we do see some push on the renewable as well as on the thermal power generation front. Four years back, there were concerns that thermal power may not be required much and PLFs were coming down for the operating plants, but in the last three years, strong demand growth could change that in the near future. We could see more thermal capacities coming online.

From the COP28 targets which we have set, most of the companies know exactly how capacity addition is happening and also the longevity of this theme? Is power and electricity a decadal theme in India because investment is pouring into generation, transmission, wires and cables, the entire value chain?
Girish Madan: Certainly, the demand is there and we have seen a strong trend over the last three years. It may not sustain at current levels of 8-9%, but there will be strong demand of above 5-6% level. In addition to demand, transition is also happening in the sector. There is more and more power that needs to be supplied through renewable generation.

India has committed towards its COP26 target as well as long-term 2070 at zero target. So, with this renewable generation, there is demand for renewable capacity addition as well as capex on both the transmission and distribution grid side because renewable generation is inherently volatile as compared to thermal generation which is relatively stable.

In order to accommodate this volatile generation, we need storage both at the transmission side as well as the distribution side and the capex requirement would be enhanced. As is rightly said, this is not a two-three-year phenomenon, this transition is going to continue into the next decade or so. NTPC has announced a 2032 target of adding 60 gigawatt of renewable capacity. Corporates are planning for the next decade of growth as far as renewable capacities are concerned.

Out of the entire power value chain, you have been a very close observer. Where do you think the highest earnings growth is going to come next decade?
Girish Madan: As a rating agency, we concentrate more on the broader themes in terms of EBITDA generation. Profitability is something we keep an eye on. But speaking about where the earnings growth could come in, it would be a combination of both generation sides where we have seen large renewable capacities being added. We have seen some pressure on the earnings because tariffs were coming down as competitive intensity was increasing in the sector, but of late the profitability should increase because some of the variables have turned in favour of the Gencos. Also, some of the commodity prices have come down which was a risk one-and-a-half years back.

On the solar module front, we have seen 20% to 30% correction in prices. All these factors could lead to enhanced EBITDA generation as well as profitability for these Gencos.