CERC’s draft norms likely to hit thermal power producers hardest

Investors reacted sharply to the Central Electricity Regulatory Commission’s (CERC’s) draft tariff determination guidelines, released on Tuesday, for central government-owned power generation utilities.

Stocks of state-run power producers fell, with NTPC Ltd, the nation’s top electricity generator, being hit the hardest. The stock plunged 11% on BSE, eroding the company’s market value by Rs.14,223 crore.

The draft guidelines for fiscal 2015 to fiscal 2019 attempt to tighten operating norms for running thermal power stations and thermal power generating utilities, including changes in the heat rate and the incentive structure from plant availability factor (PAF) to plant load factor (PLF).

 

PAF refers to whether a plant was available for generation or not. If it was available, it receives incentive irrespective of whether it generates power or not. PLF refers to actual generation from the plant as against its installed capacity.

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Similarly, CERC proposes to link recovery of tax from the customers of power producers on the basis of actual payment of tax. In the earlier regime, if a firm managed to save on tax because of smart tax planning, it was allowed to keep such gains.

 

Brokerage firm Emkay Global Financial Services Ltd, in its report released on Tuesday, said the new norms are going to reduce NTPC’s return on equity (RoE) by 6.2% percentage points. The company’s RoE in fiscal 2013 was 23.4%.

 

PLF may vary depending on the demand from the electricity distribution utilities, but the actual generation capability or PAF remains the same, NTPC chairman and managing director Arup Roy Choudhury told reporters in New Delhi. “The PAF is generally higher than the PLF of the plant, therefore our incentives should not be linked to PLF,” he said.

 

NTPC said it will respond to the draft regulations by CERC.

CERC has also proposed to bring down heat rate—from 2,425 kilocalories (kCal)/kilowatt per hour (kWh) to 2,375 kCal/kWh. The heat energy required to produce one unit of power is called heat rate. Though the average heat rate of NTPC’s power station is 2,350 kCal/kWh, the new norms alter the incentive structure drastically, giving NTPC a lower incentive.

 

Though the new guidelines will also have an impact on other state-owned power producers from the hydroelectric sector such as NHPC Ltd, SJVN Ltd and transmission sector companies such as Power Grid Corp. of India Ltd, analysts said the impact will be minimal.

 

“The proposed changes significantly affect thermal generators as operating norms such as heat rate and oil consumption are tightened. This will affect margins overnight from the new control period onward, and a more desired approach would have been to permit some sharing of the efficiency gains over a period of time, before clawing them back. The central sector companies use the financial surplus to develop and provide equity for new projects, and the new norms will affect future growth,” said Kameswara Rao, executive director and leader of energy, utilities and mining practice at consulting firm PwC.

 

“On a positive note, the order provides true up for gains or losses from project construction costs beyond a band of 5%. This gives comfort of an assured recovery mechanism to companies that suffer from delays in project execution for reasons beyond their control,” he said.

 

Neyveli Lignite Corp. Ltd fell 1.53% to Rs.61.25 on BSE while PowerGrid shed 3.01% to Rs.98.30, NTPC ended trading at Rs.136, down 11.26%, SJVN declined 2.88% to Rs.20.25 and NHPC fell 1.37% to Rs.18.05. The BSE Power index fell 4.12% to 1,661.93 points while India’s benchmark Sensex fell 0.33% to close at 21,255.26 points.