New regulations set by CERC playing spoilsport, claims power major
As NTPC, the largest thermal power producer in the country, grapples with declining profits in a series of quarterly results over the last two years, the company has sought to lay the blame on regulatory uncertainty and called for a less intrusive regulatory regime, citing the existence of a fully matured power sector in the country.
In the last five quarters, the company, which provides 25% of India’s base load from an installed capacity of over 45,000 MW, has only had one quarter in which its profit rose year over year as well as sequentially.
The slide in the company’s profit began with the introduction of new regulations for defining operative norms and fixing multi-year tariff by the Central Electricity Regulatory Commission (CERC) for the control period of five years, from 2014 to 2019. These regulations are meant for companies like NTPC that have entered into cost-plus tariff pacts.
“The regulator should just fix a tariff ceiling based on the average cost of supply for the country and let the company decide the operating details of its plants, to be able to adhere to the ceiling while making profits,” Kulamani Biswal, director finance, NTPC told FE on the sidelines of a regulators’ conference organised by Independent Power Producer Association of India in Goa last week. He added that regulatory uncertainty had managed to scare investors off the sector as the framework was too heavy handed for companies.
Biswal cited changes in two regulations—among several others–pertaining to change in incentive structure from plant availability factor (PAF) to plant load factor (PLF) and withdrawal of tax arbitrage as the most damaging for the company’s profitability.
Biswal proposed that regulators should cap cost-plus tariff at R3.30/unit—the average cost of supply in the country—and stay away from calculations that involve operations and maintenance cost (O&M) and other costs involving amount of oil used in different plants. A tariff arrived at after an elaborate process not only consumes time and energy of the company but restricts it severely in employing innovation to improve efficiency.
“At this cost we would be able to sell more power and be able to run our plants at 90% PLF. This would mean generation of more units over which the entire fixed cost could be spread, thus bringing the cost of power down,” Biswal said. He added that if regulations were limited to the tariff ceiling then states wouldn’t resort to relinquishing their allotted power, as was the case with Delhi and Haryana, two states that have stopped buying power from NTPC’s Jhajjar power plant due to a tariff of over Rs 5/unit.
The first change in regulation has rendered the power producer helpless as PLF is a function of demand for electricity which has been low over the last 2-3 years due to the inability of state-owned distribution companies to buy power owing to high level of indebtedness and shortage of working capital.
As for the second damaging change in regulations, companies were earlier allowed to retain tax benefits by recovering higher tax from the consumer even if they actually paid lower tax. This has been withdrawn and companies like NTPC can avail benefits of only what they have paid. This has further hit NTPC’s profitability.
Industry experts, however, believe that NTPC being the preeminent PSU in the power sector has always had the best of conditions to operate in and make profits and while current regulations do not favour the company, it could devise ways to keep improving its profitability.
It is also worth noting that at a time when most developers had stranded capacity due to lack of buyers, NTPC signed up with most states for the next 4-5 years under the cost-plus tariff regime which insulates it from competition, an industry insider said on the condition of anonymity.