A Moody's Investors Service- ICRA report on Thursday upgraded the outlook for the Indian power sector to "stable" over the next 12-18 months with a Baa3 positive rating, saying it reflects sustained improvement in domestic coal availability.

"In fact, we changed the outlook for the Indian power sector to stable from negative, because the increased domestic production of coal will ease constraints on fuel supply," Abhishek Tyagi, a Moody's Vice President, said in a statement.

The Baa3 rating indicates moderate credit risk.

The American rating agency also said that the Indian government's 'Ujwal Discom Assurance Yojana' (Uday) debt restructuring scheme for distressed discoms being implemented by 21 states so far will likely improve their financial capacity to make timely payments to power generators.

"These distribution utilities will also benefit from the lower cost of power purchases, due to improved domestic coal availability, the subdued tariff level of short-term traded power, and flexibility provided by the government to generating companies for the optimal utilization of coal," Moody's Indian affiliate ICRA Senior Vice President Sabyasachi Majumdar said. 

After long opposition to Uday, Tamil Nadu became the 21st state to join the scheme earlier this week, under which the state stands to benefit by Rs 11,000 crore through savings in interest cost and on power distribution and transmission losses.

ICRA said that an improvement in domestic coal availability has substantially mitigated coal supply risk and the risk of under-recovery in fuel costs due to a reliance on costlier coal imports for thermal independent power producers (IPPs).

ICRA also said that the improving financial profile of distribution utilities will benefit IPPs through a reduction in the receivable cycle, and a modest improvement in the plant load factor over the next 18 months.

In their outlook for non-financial corporates in India last week, Moody's- ICRA said that discoms will benefit from the lower cost of power purchases, due to improved domestic coal availability, the subdued tariff level of short-term traded power, and flexibility provided by the government to generating companies for the optimal utilization of coal.

ICRA noted the uncertainty as to the timing of tariff compensations for affected thermal IPPs, given that concerned authorities are yet to decide on the timing of such compensations for imported coal-based projects affected by changes in regulations in Indonesia that impacted coal import prices.

The Moody's Global Credit Research report on Thursday also said that renewable generation could act as a complementary source of power, rather than a competitor to thermal energy.

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