The tariff regulations will have implications for returns for state-run NTPC the most, as its sells power only through the cost-plus system.
The Central Electricity Regulatory Commission (CERC), which determines rates for about 76 gigawatt (GW) power plants that sell power under the ‘cost-plus’ system, has proposed to tighten a few norms for ‘fixed costs’ and allow generators to recover more revenue through ‘variable cost,’ primarily the cost of fuel. The regulator’s proposed draft tariff structure for FY19-24 is being seen by analysts as “a fine balancing act of safeguarding the interest of consumers while ensuring adequate return for developers”.
The tariff regulations will have implications for returns for state-run NTPC the most, as its sells power only through the cost-plus system. Since its plants supply one-fifth of the country’s overall thermal power, research firm Icra said if the CERC’s proposals are implemented, there would be an overall reduction of 2 paise/unit in power procurement cost. The average rate at which states buy non-renewable (mostly coal-based) power is Rs 3.53/unit.
Additionally, the norms could also have a bearing on the resolution of stressed independent power assets such as Jaiprakash Power Ventures’ Nigrie and Bina plants, Avantha Group’s Jhabua plant, GVK Power’s Goindwal Sahib, KVK Group’s Nilachal unit and Lanco Babandh station, which supply part of their electricity under the cost-plus regime. Fixed cost represents pre-determined expenditure components, including debt service obligation and risk-free returns, while variable charges make up for fuel costs which vary according to the market.
Power plants are contractually entitled to receive fixed costs even when buyers do not procure electricity from these units. However, plants need to display a minimum plant availability factor (PAF) of 83% to claim fixed costs. The CERC has proposed to tighten working capital norms for these power plants. Generators would now have to pay late payment surcharge of 1.25% if they fail to clear the bills within 45 days, lowering the receivable period from the existing span of 60 days. The normative coal stock at non-pit head plants has also been proposed to be brought down to 20 days from 30 days. This might lower NTPC’s return on equity by one percentage point, analysts said.
The regulator has also suggested that power plants which have completed 25 years of operations should receive lower fixed costs. IDFC Securities estimates that this decision may lower NTPC’s equity base by Rs 5,200 crore and Rs 1,200 crore in FY20 and FY21, respectively. Power generation units in NTPC’s Korba, Ramagundam, Talcher, Rihand, Vindyachal, Singrauli and Unchahar plants have already completed their ‘useful lives’ of 25 years. Other units in Dadri, Farakka, Kahalgaon, Talcher and Tanda are nearing their useful lives.
Allaying fears of the regulator slashing the normative profitability levels for thermal generation, the CERC has maintained the base return on equity at 15.5%. Other benefits proposed by the regulator include the provision for recovery of higher variable charge towards loss in fuel quality while coal is ferried and stored. Analysts at Ind-Ra expect the new proposed norms to raise energy charge by 6 paise/unit.
This is also seen to put a check on NTPC’s 5-6% under-recovery of fuel charges. SBICAP Securities pointed out that if the CERC allows retrospective recovery on this account, it might fetch NTPC a one-time additional recovery of about Rs 4,000-4,500 crore. Power generators would also receive an additional incentive of 65 paise/unit if they offer power during the period of peak load.