Over the past five years, prices of goods and services have risen across the board, but this is not reflected in power rates. Cost of power grew five per cent per annum in the five years to FY10, says CRISIL, while household expenditure rose 10.6 per cent. Per capital income during this period grew 13.4 per cent.
The lack of pricing power in the face of sharp inflation in prices of fuel (coal and gas) had created a crisis-like situation for power producers. Therefore, rate rises by state electricity boards (SEBs) came as a relief for power utilities and related sectors. Domestic coal prices had increased six per cent and imported coal prices had moved 12 per cent per annum. The average price of gas, used to fire power plants, grew nine per cent. As a result, annual losses of utilities before subsidies had ballooned to 33 per cent a year. Accumulated losses were estimated at nearly Rs 2,00,000 crore at the end of FY12. According to CRISIL, with rate growth lagging fuel prices, finances of utilities have worsened.
Given the adverse financial dynamics of the sector, rate rises announced by most SEBs may sound good but are not sufficient to diffuse the ticking time bomb. Not only power producers, but also distribution companies, power financiers and banks are at stake. According to analysts at Sharekhan, though rate rises are inadequate in some states, it does ease the pain of debt-laden SEBs and sets the ball rolling for the sector to come out of the mess. Analysts believe distribution companies need to raise rates at a CAGR of 11-58 per cent over FY13 and FY14 to stay viable. According to Avendus Securities, if there are no reforms, losses of distribution companies, as a percentage of nominal gross domestic product, may reach 1.2 per cent by March 2014, as seen between FY99 and FY02.
It’s this make or break situation that makes analysts believe the government will push for key reforms to avert a disaster. Power analysts feel there are two things the government needs to ensure. First, regular cost-linked growth in rates is imperative for the sector to be financially viable. Second, given that coal production has been stagnant for the past four years, boosting domestic coal production is crucial. The hurdles to captive coal mining too, seem to be easing, given the severe shortage of coal and capacities, likely to come up in the next few years. However, extraction may start only after two years.
Given the possibility of various blockages being eased in the sector, an uptick in rates and increase in supply of lower-cost coal, analysts believe the earnings outlook seems to have improved. Avendus believes consensus forecast for FY13 and FY14 earnings growth of power companies exceed that of the Nifty.