Power scrips tank as regulator seeks to rejig tariff rules
Dec 10 2013 , New Delhi/Mumbai
NTPC worst hit; NHPC, PGCIL, SJVN also impacted: analysts
The draft released by the Central Electricity Regulatory Commission (CERC) late on Monday seeks to tighten norms for normative station heat rate (SHR), operation and maintenance (O&M) expenses, secondary fuel (SFO) and incentive-based income. The final guidelines will be out by February next year.
Reacting to the development, power sector stocks tumbled by up to 11 per cent, with NTPC leading the fall. Experts said the draft norms, if accepted in the present form, might hurt earnings per share (EPS) of power utility firms by up to 12 per cent.
According to the draft, the incentive structure will be changed to plant load factor (PLF) from plant availability factor (PAF) at present. PLF generally remains lower than PAF. At present, even if a generating station notifies its ‘availability’ to generate power, it is incentivised. However, with the incentive structure shifting to PAF, these firms will be rewarded only if a buyer actually purchases power.
Utilities would now be charging a flat tariff at Rs 0.50 per unit for scheduled generation above 85 per cent normative PLF.
A senior NTPC official said prima facie the changes are positive, while he expects to sort out with the government the negatives in terms of incentives based on higher PLF and cost recoveries based on PFA.
“This paper is under discussion, and we are going through it with a fine comb before it is finalised. We expect the regulator, which is a statutory body, to encourage development of the power sector and not disincentivise or demotivate the country’s largest power generating company. Regarding fear of our investors, we would like to assure them of continued returns and thank them for their support,” he said.
The draft limits the recovery of tax actually paid by utilities such as NTPC. Earlier, utilities were allowed to retain tax benefits applicable to power projects, by recovering higher tax from the beneficiaries than the actual income tax paid. Beneficiaries are distribution licensees who purchase electricity through long-term power purchase agreements (PPAs) either directly or through a trading licensee.
Ravi Uppal, MD of Jindal Steel and Power, said the issue of fixed cost recovery based on plant availability factor (PAF) is a step in the right direction, since it would mandate companies to use standard equipment to achieve higher efficiency, which may not be happening in case of certain companies sourcing cheap products from China and other countries. “Overall the issues of PLF and removal of tax incentives are steps that can be avoided in the current situation of slowdown, as fuel is not available and state electricity boards are not buying,” Uppal said.
Amit Golchha, power analyst at Emkay Global Financial Services, said, “We see a huge negative impact for NTPC, mainly from the shift of the incentive structure to PLF from PAF and no tax grossing up of RoE. However, we expect the impact to be less for PGCIL, NHPC and SJVN. These regulations, if implemented, will impact FY15 EPS by 12-14 per cent for NTPC, 6-8 per cent for PGCIL, 3-4 per cent for SJVN and 1-2 per cent for NHPC. Though the final regulations are expected by February, we expect the stocks to react negatively.”
The normative plant availability factor (PAF) for recovery of annual fixed costs has been maintained at 85 per cent against market expectations of lower PAF due to fuel shortage. The pre-tax RoE of 15.50 per cent has also been kept unchanged. “The draft norms will be more negative for firms with regulated business model than companies with merchant business model,” said Rikesh Parikh of Motilal Oswal Financial Services. Sudip Bandyopadhyay of Destimoney Securities said, “Firms with old power plants like NTPC would be hurt, as new power plants offer better efficiency.”
Shares of NTPC plunged 11.26 per cent to close at Rs 136. Power Grid fell 3.01 per cent to Rs 98.30. NHPC and SJVN declined 1.37 per cent and 2.88 per cent, respectively. Torrent Power, Adani Power and Tata Power fell 4.83 per cent, 4.43 per cent and 1.52 per cent, respectively. The draft seeks to reduce the station heat rate (SHR) for coal-based stations to 2375kCal/kWh from 2,400 kCal/kWh at present.
“NTPC, which has historically earned higher RoE of over 24 per cent via incentives, operational efficiency and tax benefits, is likely to see pressure on profitability/RoE impacting valuations. While the tighter operational norms will also impact Power Grid,” said Edelweiss Securities.