Analyst Corner: ‘Neutral’ rating on Tata Power with TP of Rs 72

By: | Published: January 9, 2019 3:13 AM

After about a year-long competitive bidding process, BEST DISCOM found it economical to extend the existing PPA with Tata Power’s Trombay and hydro power plants due to transmission constraints in Mumbai. Mumbai distribution circle relies heavily on embedded generation.

‘Neutral’ rating on Tata Power with TP of Rs 72

After about a year-long competitive bidding process, BEST DISCOM found it economical to extend the existing PPA with Tata Power’s Trombay and hydro power plants due to transmission constraints in Mumbai. Mumbai distribution circle relies heavily on embedded generation. There are limitations in sourcing power from outside Mumbai. The PPA (for 676MW) is extended by five years to Mar’ 24. Tariff will continue to be based on regulatory norms in Maharashtra. The regulated equity in the plant is INR19b (1,847MW).

The blended tariff of Rs 4.63/kWh under the existing PPA was lower than the competitively discovered price of Rs 4.72/kWh, which also shifted the balance in favor of Tata. The blended tariff under the existing PPA includes hydro assets of 227MW costing less than Rs 2.5/kWh and remaining coal/gas plants costing upward of Rs 4/kWh. BEST could have sliced and chosen the favorable portion from the existing PPA (i.e. hydro assets) and portions from the competitive bids to get a blended tariff lower than Rs 4.63/kWh. However, due to transmission limitation, requiring compulsory running of embedded generation, this option became unviable.

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BEST’s total requirement was 750MW. It will source another 100MW (676MW is from Tata Trombay) from Manikaran Energy (to be supplied by Sai Wardha power plant) at INR3.94/kWh for five years. DISCOMs/regulators continue preferring structured power purchase contracts instead of relying on exchanges. Of BEST’s requirement of 750MW, only 300MW is base load power. Medium-term contracts, instead of 25-year contracts, are likely to be the way forward. It was also noticed in the pilot scheme by PTC India for three-year PPA for 2,500MW.

We maintain our Neutral rating on Tata Power with a SOTP-based TP of `72/share.

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