Power plants are contractually entitled to receive fixed costs for recovering capital expenses even though when buyers do not procure electricity from the units.
Reducing fixed costs of power plants to salvage stressed electricity distribution companies (discoms) from the current crisis stemming from the lockdown to contain the coronavirus outbreak can reduce NTPC’s FY21 profit by about 9%, brokerage firm Jefferies noted.
In a meeting recently held between Union power secretary Sanjiv Nandan Sahai and state power department officials, the discoms sought reliefs from various fronts, including discount on fixed charges payable to generators when power is not being procured from plants.
NTPC’s annual fixed charges are in the tune of Rs 37,000 crore, which comprises interests on long-term and working capital loans, depreciation, operations and maintenance charges and return on equity (RoE). NTPC’s fixed charges are calculated accounting for a base RoE at 15.5%, which comes to about Rs 8,600 crore annually. Jefferies said that if a waiver of six weeks is offered on the RoE component of the fixed charge, it implies about 9% impact on NTPC’s estimated profit for FY21.
Power plants are contractually entitled to receive fixed costs for recovering capital expenses even though when buyers do not procure electricity from the units. Though legal contracts on regulated RoEs are air-tight, if some changes in this are announced, Jefferies believes “it will not lead to a sustainable valuation or earnings impact as long as Central Electricity Regulatory Commission (CERC) makes it clear that an unprecedented event such as a lockdown is the only reason for this change and it is only one-time”.
Every 100 bps cut in regulated RoE implies about 4% impact on NTPC’s profit. Reduced fixed tariffs would reverse the gains NTPC is seen to have from improved coal availability. As FE recently reported, NTPC’s fixed cost under-recoveries are seen to fall to around Rs 200 crore in FY20 (a 75% decrease annually), with the state-run power-generation behemoth recording better plant availability factor amid low power demand.
Other reliefs sought by the discoms include the suspension of the condition of the Uday scheme, which allows discoms to borrow only up to 25% of their previous year’s revenue as working capital and easing of NPA classification norms. The Union power ministry is deliberating on a plan to infuse liquidity in stressed through Centre-run PFC-REC, though the monetary value of the relief has not been ascertained yet. However, PFC and REC are likely to seek state government guarantees against the additional loans that would be given to discoms.