The recent loan scam has led to fears of risk aversion amongst banks and potential impact on project lending, contributing towards under-performance of JSW Energy, Adani Power and Reliance Power. NTPC?s move to lock in its capacities at long-term PPAs (power purchase agreements), guaranteeing 15.5% return on equity, insulates it from pricing, cost of debt and fuel costing vagaries—important areas of recent investor concern.

Short-term transactions as a % of total power generated fell to 8.85% in Oct ’10, compared to 10.7% in Sep ’10 and a peak level of 12.9%. Within short-term transactions, the share of bilateral contracts fell sharply to 41%, compared to 48.5% in Sep ’10 and a peak level of 58%. On the other hand, share of unscheduled interchange (UI) rose to 39.6% (33.4% month-go) and that of power exchange rose to 19.2% (18.1% month-ago).

In our view, there are two plausible explanations to this: (i) state utilities are refraining from the market, choosing not to buy expensive power and / or (ii) IPPs did not want to enter into three-month bilateral contracts around July-August (which in turn is showing in Nov volumes) as forward contract rates were lower. In hindsight, state utilities made the right decision not to enter into bilateral transactions, as UI/ exchange prices have remained lower than bilaterals over last few months.

Nov ’10 energy deficit of 6.5% is down 140 bps (basis points) YoY, while average energy deficit over the last six months (7.5%) is down 200 bps YoY. The decline is steeper in the case of peak deficit. Nov ’10 peak deficit of 8.7% is down 350 basis points, while average peak deficit over the last six months (10.46%) is down 224 basis points. Power demand growth has been weak over the past few months. Average monthly energy demand growth over the past four months (Aug-Nov) was just 0.8%, compared to 11.5% in the corresponding period last year. Similarly, peak demand growth over the last four months has averaged 2.4% vs 5.7% last year.

Monthly capacity addition in Nov, at 39 MW (excluding renewables), was well short of official target of 845 MW addition. All projects targetted for Nov ’11 CoD (date of commissioning) slipped. This includes Barmer Unit-5 (135 MW) of JSW Energy. Only two units of Barmer have been commissioned so far and the project is delayed by at least six months, in our view. However, the potential slippage had already been factored into market/ analyst estimates many months back, but probably was not factored in earlier by the CEA (Central Electricity Authority) in its monthly target.

CEA has maintained its FY11 cap-add (capacity addition) target of 21.4GW, vs YTD (year-to-date) actual of 7.67 GW. While this data points towards potential slippage (which is factored into stock prices), it is imminent that lot of capacities would get bunched up over the next three years.

During 11th 5YP (Five-Year Plan) through Nov ’10, 24 GW has been added against the government?s revised target of 62 GW. With 1.5 years pending for the completion of the 11th Plan, the implied target of 38GW for the remnant Plan period seems difficult, in our view.

Valuation and stock picks: Adani Power (OW–overweight) and Lanco Infratech (OW) remain our top picks in the Indian power space, from a one-year perspective. We like Adani for its execution abilities and Lanco for its near-term capacity ramp up, diversified fuel mix and less exposure to coal price volatility.

Fuel cost and security is likely to be the key theme next month: Our colleagues are upping their global coal price forecasts, while data pointing to potential domestic coal price increase and supply shortages are pouring in too. IPPs are running for fuel security?two coal buy deals announced by Lanco (Griffin at Australia) and JSWE (CIC Energy at Botswana) recently. Deal metrics (Eg: how much is Lanco paying for this purchase) and consummation will be likely stock catalysts. On this theme, TPWR?Tata Power?(Neutral) is a net beneficiary of rising coal prices, given its stake in Indo Coal mines. We see NTPC continuing to claw back, with potential safety and assured returns as USPs. We maintain UW (underweight) on RPWR (Reliance Power), as the stock seems to be pricing in decent medium-term execution already. Greater visibility on the Chitrangi project (4GW) provides a key upside risk to valuations, in our view.

?JP Morgan