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Friday, March 25, 2011

NTPC: Merchant power entry may pay limited dividends

Public sector power major NTPC has only recently forayed into merchant power, having recently commercialised its Korba unit-7 and commissioned Farakka Unit 6, both 500-MW each. The company has received permission from the Ministry of Power to sell 15 per cent of the power generated from both these projects at prevailing merchant tariffs.
The commissioning of these projects has coincided with merchant tariffs firming up from their lows in the December quarter 2010.
Given that NTPC has definitive coal linkages for most of its projects, it may get excellent returns on this proportion, while this may not be the case with other power projects that are exposed to international coal prices.
However, the fact that NTPC today operates just 150 MW of merchant power capacity out of its installed capacities of 33,690 MW of power today reflects the Government's reservations about the sustainability of high merchant power tariffs over the medium term.
Market's perception
From a stock market standpoint, while merchant power capacities were viewed as a high potential segment until last year, the wild fluctuations in merchant tariffs over the last year have infused caution and shown how power company financials may be adversely affected by swings in these tariffs.
The merchant power tariffs, through the bilateral trade route, have fallen from an average of Rs 7 and Rs 6.4 a unit during calendar years 2008 and 2009 to Rs 4.93 a unit in 2010. With 2011 being an election year, the rates may rise again in the short term, but the additional power capacities of around 20,000 MW that are planned to be commissioned during the next 13 months, will eventually exercise a moderating influence on tariffs.
More power sold through the short-term route over the last one year also shows the moderation in tariffs. On an average, 10 per cent of the total power generated was sold through short-term route over the last one year as against four per cent and 3.3 per cent during the previous calendar years.
In addition to majority of fuel being sourced from coal linkages, NTPC also has a pass-through component for rising fuel prices, thanks to its cost-plus model in power purchase agreements. Before the CERC deadline for regulated Power Purchase Agreements (PPAs) came to an end, NTPC managed to sign PPAs based on regulated tariffs amounting to 1,00,000 MW. That places the company at an advantage, even as it trebles the current capacity, it will not be exposed to the same risks that the private companies are facing, while earning steady returns (current 15.5 per cent).
Given that tariffs through short-term route and competitive bidding are expected to converge going forward, NTPC with its higher reliance on regulated tariffs may deliver more stable and predictable earnings.

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