The rising share of renewable energy in India's power generation mix over the next five - seven years will pose a challenge to conventional power generators, said global credit rating agency Moody's Investors Service on Monday.
"This situation will be exacerbated by the fact that Moody's expects India to register a power surplus over that period, thereby pressuring the utilisation rates of thermal generators, " a Moody's statement said.
According to Moody's implementation of aggressive renewable energy capacities will be challenging, given counterparty risk issues and the need for stable policy initiatives to support long term investments.
Moody's said the renewable energy capacity is expected to grow to 175GW by 2022 compared to the current 37GW.
"The most pronounced impact of a rising share of renewables in India's energy mix will be on unregulated power companies, " said Abhishek Tyagi, Moody's vice president and senior analyst.
"These companies are directly exposed to the market impact of environmental regulations - such as the clean energy tax - and do not receive the benefit of cost recovery from rate payers, " he added.
According to Tyagi, the credit implications for individual Indian power generators will depend on their current and future generation mix, and how they adapt to the evolving policy environment.
Regulated utilities NTPC Ltd and Tata Power, whose power output is dominated by conventional sources, benefit from contracted and availability based revenues. But their business risk will increase over the long term, Moody's said.
"Domestic banks will continue to provide significant funding for renewable energy projects, but greater funding diversity is needed, " said Terry Fanous, Moody's managing director for Project and Infrastructure Finance ratings in Asia Pacific.
Attracting institutional debt will benefit from ongoing efforts by the government, supported by multilateral development banks (MDBs) as providers of credit enhancement and as facilitators.
"MDBs have already been involved in supporting renewable energy projects in India, but the scale of India's growth plan for the renewable energy industry will necessitate greater participation by MDBs to crowd in institutional capital, " Fanous added.
Citing the poor financial condition of power distribution companies in India, Tyagi said it heightens counterpart risk for renewable projects.
As for the transmission sector, companies in the industry will be affected by the need for network upgrades to manage the connectivity and intermittence of renewable energy.
Moody's points out that around 35 percent of the new generation capacity (7. 1GW) added during the first 11 months of FY2016 (fiscal year ending March 31, 2016) was from renewable energy.
This scenario is a marked shift from previous compositions of new generation capacity, which were heavily dominated by coal.