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Home News Power Sector News Competitive tariffs may not affect power PSUs

Competitive tariffs may not affect power PSUs

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NTPCThe Ministry of Power's proposal to move out of cost-plus power purchase agreements to competitive tariff bidding for power projects from January may not have an adverse impact on public sector power generation companies in the medium term. Private companies on the other hand, have already proved their capability in competitive bidding in UMPPs, accepting lower return on equity on their projects.

For NTPC, the impact is neutral at least until end of 12 {+t} {+h} five year plan given that it intends to secure a good portion of its capacities through power purchase agreements (PPAs).

According to the NTPC's management, the company had signed cumulative PPAs of 62,000 MW as of September 2010 under regulated tariff mode and had plans of securing around 75,000 MW of power purchase agreements through regulated tariff route before the new regime takes effect. Therefore, the company is protected till end of 12 {+t} {+h} plan and the early part of 13 {+t} {+h} five year plan. With enough projects in hand, NTPC may also not choose to participate in competitive bidding and may choose to protect margins for a while.

As tariff-based bidding is market-determined, tariffs in such bidding are typically lower than cost-based bids. While this is positive for distribution companies, which have weak financials, power players do lose out on returns as has been the case with UMPPs.

However, using low cost power equipment and merchant operations to make up for lost returns on PPAs are some of the strategies that private players have implemented, to keep returns viable with lower tariffs.

In the case of regulated tariff projects, with majority of costs being passed-through, the incentive to save costs has also been low so far. With the regulated tariffs disallowed for future projects of players such as NTPC, Neyveli Lignite Corporation and Power Grid Corporation, these companies may be forced to improve efficiency and save costs to tackle lower returns. NTPC for its part is scouting for coal assets abroad to gain fuel security going forward.

If reports of the company closing in on Indonesian coal (said to be relatively inexpensive) transpires, it may aid the company to participate in competitive tariff bids.

Source- Hindu Businessline


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