5 reasons why CERC's draft tariff guidelines are negative for NTPC

Stock has slumped over 10% as draft guidelines seeks to put an end to incentives

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NTPC, the largest power generating company in the country slumped over 10% on the bourses after Central Electricity Regulatory Commission (CERC) came out with a new set of draft regulations that plans to fix tariffs for the power sector for the next five years.

 

Investors sold the stock in large numbers as it became clear that the draft regulations are negative for NTPC 

 

Following are the 5 key factors in the CERC draft regulations which if approved will impact the power sector. 

 

1) While CERC has maintained the RoE (Return on Equity) at 15.5 per cent with additional 0.5 per cent for timely completion of projects for generating and projects, it has reduced incentives for generation as well as transmission. This in turn means that returns of companies in the sector will be lower. Companies generally used to earn more than 15.5 per cent by way of incentives. For example, NTPC earns a RoE of over 24 per cent (one of the highest) on account of incentives, operational efficiency and tax benefits.

 

2) CERC has maintained normal operating parameters. This means those companies who have a higher cost structure will under recover their cost and will not be able to generate higher profits. Costs have gone up over the past five years, thus companies will not be able to pass on higher costs.

 

3) One of the harshest recommendations is to change the incentive structure from Plant Availability Factor (PAF) to Plant Load Factor (PLF).  PAF is the average of daily declared capacities (of ‘available for generation’ capacity) of a generating station as a percentage of installed capacity while PLF is amount of power actually generated as a percentage of installed capacity. Earlier, even if a generating station notified its ‘availability’ (ready to generate power if buyer was willing to buy it) they were rewarded. Now they would only get the benefit if the buyer actually consumes or purchases power. What it means is that power generating units will be affected if state electricity boards are not willing to purchase power. Though a prudent step by CERC, it would affect the profitability of generation companies.

 

4) Tax arbitrage has been withdrawn. Earlier companies were allowed to retain tax benefits by recovering higher tax from the consumer even if they actually pay lower tax. This has been withdrawn and they will now be able to get the benefit of only what they have paid. Again a step in the right direction, though the generating units will have to take a hit.

 

5) CERC has reduced station heat rate from 2,425 kcal/kwh to 2,375 kcal/kwh. Heat rate is the amount of heat energy required to produce a unit of power. Thus lower the heat rate, the more efficient the plant. NTPC average heat rate is 2,350 kcal/kwh. Companies were incentivised if their heat rate was lower than the one set by CERC. After reduction of the base heat rate incentives to companies will get reduced. CERC has arrived at the revised heat rate after taking into account performance of various plants over the last five years.

 

To summarize, the regulations by CERC would mean lesser profit for power plants but has the potential of making them more efficient by removing the flab in pricing. That’s hardly a consolation for NTPC’s fall though.