CERC's new draft electricity tariffs: Little change for power utilities

The new draft power tariffs released by the CERC imply there will not be much change in the financial dynamics of the power sector once they come into effect in April this year since policy continuity has been maintained.

Investor concerns about lower initial depreciation for back-ended loading of tariffs and lower return on equity (RoE) for transmission assets were restricted to “new assets”, leaving the earnings profile of existing assets unchanged.

The 15.5 per cent rate of regulated return remains unchanged for thermal and transmission assets, while new transmission assets (commissioned after April 1, 2024) will have a lower RoE of 15 per cent.

Among companies, the Power Grid will see a minimal impact since most of its new assets are being built via competitive bidding.

NHPC will benefit from a higher RoE (17 per cent instead of 16.5 per cent) for the new Subansiri and Parbati II projects.

The changes appear neutral for NTPC.

The CERC has reduced the accelerated depreciation on new assets to 4.22 per cent (from 5.28 per cent), spreading the depreciation over 15 years from 12 years previously.

The change in depreciation rate will not impact reported earnings since lower revenue will be offset by a lower depreciation charge but it assumes loan repayment over 15 years.

For existing or new hydro projects, the capital cost now also includes expenditure toward developing local infrastructure (not exceeding Rs 10 lakh or Rs 1 million per MW) if funding is not provided for under “Budgetary Support for Flood Moderation and for Budgetary support for enabling infrastructure”.

The draft regulations have also specified the contours of capital cost for the determination of tariffs for projects acquired through NCLT proceedings (operational and under construction).

There is a marginal reduction in the allowable interest rate for working capital, which is now MCLR plus 325 bps (from MCLR plus 350 bps).

The CERC has marginally tightened fuel efficiency parameters by reducing the station heat rate for coal projects to 2,375 kcal/kwh (from 2,390 kcal/kwh).

To compensate, the regulator has increased the incentive for generation during peak hours to Rs 0.75/kwh (from Rs 0.65/kwh) for generation above 85 per cent PLF (plant load factor).

Availability benchmarks for transmission projects have been maintained at 98 per cent and 96 per cent for AC and DC, respectively.

For maintaining grid frequency between 49.5–50.5 Hz, incentive provisions are at 1 per cent and 4 per cent for thermal and hydro assets, respectively.

Shares in the power sector saw little movement on the release of the draft, which will of course be debated with stakeholders.

It may be noted that power sector stocks are mostly trading at multi-year highs in terms of valuations.

This is perhaps due to strong demand through CY23 and strong demand projections based on the expectation of GDP growth acceleration.

NHPC was the only major gainer, up over 4 per cent, while NTPC was down 0.66 per cent and Power Grid was almost flat, on the BSE on Friday.

The high valuations are a sign of confidence in these utilities, but this is also sustainable only if there are no slippages in demand projection.