Power traders at from discoms: Fitch

Poor financial health of state electricity boards could pose significant business risks for power traders.

The poor financial health of state electricity boards could pose significant business risks for power traders in the country,says rating agency Fitch.

In a report released today,Fitch Ratings said the credit risk of power traders has become 8220;riskier8221; due to profitability and liquidity constraints faced by state power utilities.

If these utilities are having liquidity problems which are leading to delays or defaults in their obligation to power traders,then this in turn increases the business risk for power traders,8221; it noted.

This could lead investors in power trading companies to either seek higher return on the investments or seek alternate avenues for investment.

Leading power traders include PTC India and Tata Power Trading Company.

Going by estimates,over the past four years,the top five trading licensees have controlled over 80 per cent of the market in terms of volumes.

Some of the large loss making state power utilities come from the states for Tamil Nadu,Uttar Pradesh,Madhya Pradesh. These are also largest buyers of short-term electricity through power traders,Fitch Ratings said.

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The financial health of state power utilities,the major customers of power traders,has deteriorated with aggregate annual book losses widening 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,8221; the report said.

As per Planning Commission8217;s estimates,electricity distribution losses totalled a whopping Rs 70,000 crore in 2010-11.

According to Fitch,the biggest short-term buyers SPUs in Tamil Nadu and Rajasthan 8212; face huge energy deficits with largest cash losses on a revenue and subsidy-realised basis.

8220;Hence,these states will remain net-buyers on short-term power markets and continue to act as major counterparties for power traders. This increases the risk for undiversified power traders significantly,8221; it added.

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The report pointed out that traders with strong equity base and high cash balance are better placed since they have the buffer to absorb any increase in the working capital cycle in the event of delays or defaults by SPUs.

Director in Fitch8217;s Asia Pacific Utilities team Salil Garg said the agency expects larger traders to face low business risk due to many factors,including economies of scale and diversified customer base.