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Home News Power Sector News CERC notifies power tariff regulations for 5 years

CERC notifies power tariff regulations for 5 years

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CERCIn what will impact state-owned power generation companies such as NTPC Ltd, India's apex power sector regulator Central Electricity Regulatory Commission (CERC) has asked for a shift in the incentive structure—moving from incentives based on plant availability factor (PAF) to plant load factor (PLF).
PAF refers to whether a plant was available for generation or not. If it was available, it receives a financial incentive irrespective of whether it generates power or not. PLF, on the other hand, refers to actual power generation from the plant.
However, PLF is dependent on the financial position of the state electricity boards (SEBs), which makes NTPC particularly vulnerable to the CERC order because NTPC's core business is generation and sale of electricity to SEBs.


Electricity distribution companies owned by the state governments owe a staggering Rs.2 trillion to lenders. This has reduced their ability to buy power, and a lower demand for power translates to a lower PLF.
CERC's multi-year tariff regulations for projects, based on an assured return on equity (RoE) business model, are applicable from financial years 2014-19. Utilities such as NTPC have an assured RoE of 15.5%. These guidelines will also impact other central sector utilities such as Power Grid Corp. of India Ltd, NHPC Ltd and SJVN Ltd when they come into effect from 1 April.
Investors reacted sharply to the order and shares of NTPC fell as much as 11.5% to Rs.116.95, its lowest since 21 November 2008.
The order also linked recovery of tax from the customers of power producers on the basis of actual payment of tax. In the earlier regime, if a firm managed to save on tax because of smart tax planning, it was allowed to keep such gains.
CERC also brought down the heat rate—the heat energy required to produce one unit of power—by 2%, altering the incentive structure drastically, giving NTPC a lower incentive.
This would reduce the volume of coal purchased per unit. Earlier NTPC could burn more coal to generate one unit and this was allowed by the regulator to be claimed from the electricity procurers.
Also, auxiliary consumption has been cut by 9% to 12.5%. Auxiliary consumption is energy consumed within the project and is part of the tariff structure. By reducing the auxiliary consumption to 12.5%, NTPC will only be reimbursed for this quantum by the electricity procurers.
An NTPC spokesperson in an emailed response termed the order "positive" and said, "Target availability (has been) reduced to 83% from 85% for fixed cost recovery," and "heat rate for 35 nos (numbers) of 200MW units being run by NTPC relaxed by 25 kcal (kilo calories)." Also, "capital spares will now be a pass-through, RoE grossing up with effective tax rate allowed," and "water charges, increase in special allowance, higher escalation on O&M (operations and maintenance) charges, etc., remain."
However, analysts are not enthused by the order.
"The new regulations continue to penalize NTPC for inefficiencies (for PAF lower than 83%-85%) but to a great extent would cap incentives for efficient operations and penalise the company for uncontrollable factors such as the PLF. Such regulatory intent could be viewed as a negative for the stock and impact its investment sentiment in the near term," Credit Suisse India Research wrote in a report dated 24 February. "The project would have to meet a PAF of 85% to recover its fixed costs. But, incentives would now be available only for PLF higher than 85%."
Of India's current capacity of 233,930MW, NTPC has an 18.14% share with an installed power generation capacity of 42,454MW. The utility plans to add 14,038MW during the 12th five-year plan period (2012-17) and has budgeted capital expenditure of Rs.1.5 trillion. It has set up a target of becoming a 128,000MW power producer by 2032.
"Investments in the power sector are currently challenged, mainly led by rising domestic coal deficits and weak SEB finances among various other issues. In the current scenario, we expect CERC to favour efficient power generators such as NTPC. However, contrary to our expectations, the regulations are harsh, especially considering the lopsided judgments delivered by the CERC in favour of the IPPs (independent power producers) towards the IPP petitions seeking compensatory tariffs," the Credit Suisse report said.
CERC in separate orders dated Friday upheld its earlier view and ruled that Tata Power Co. Ltd and Adani Power Ltd will be allowed to temporarily increase tariffs to compensate for the additional fuel costs they are incurring. This is on account of coal imports becoming expensive when the Indonesian government in 2012 started levying higher royalty and income tax, affecting the financial viability of the projects. In addition, CERC also ordered a lump-sum payment of Rs.829.75 crore and Rs.329.45 crore to Adani Power and Tata Power's Coastal Gujarat Power Ltd, respectively.

Source- Mint

 

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