"Launch of new generation projects will slow down in 2012 because of lower investor interest over fuel availability, softening of merchant power prices, higher fuel costs, higher interest rates and slow progress on reforms at distribution level," Fitch said.
About 8,000 to 10,000 MW of new capacity is expected to be added this year.
"Fresh investment is unlikely to pick up (power sector) in 2012," Salil Garg, the director of ratings agency Fitch's Asia-Pacific Utilities team, told PTI.
Furthermore, access to capital would be "restricted" for weaker entities, including State Power Utilities (SPUs) and greenfield projects, the report said.
According to the report, domestic fuel availability would be low compared to the rising demand from power projects on account of environmental and land issues faced by Coal India.
Against this backdrop, power project developers would be increasingly dependent on imported coal.
"... However, the cost of imported coal and boiler design will play an important role in deciding the overall use of imported coal and hence, the overall capacity that can be commissioned," the report noted.
Fitch pointed out that the financial profile of SPUs is weak due to the lack of cost-reflective retail tariffs, delays in receipt of subsidy payments and high transmission and distribution losses.
The overall book losses of all SPUs stood at Rs 29,500 crore in FY'10, compared to just Rs 7,000 crore in FY'06. Most of the losses were in the power distribution segment.
Late last year, the high-level Shunglu panel on the financial position of distribution utilities had come out with various recommendations to improve the situation, including independence of the regulator and lowering T&D losses.
Fitch noted that implementing the Shunglu Committee suggestions would be challenging.
Source- Economic Times