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CERC reduces financial incentives of NTPC

Incentives will now be based on the metric of plant load factor and not plant availability factor


India’s apex power sector regulator Central Electricity Regulatory Commission (CERC) has passed fresh orders aimed at easing regulatory hurdles and ushering in transparency.

This is over and above the orders passed on Friday offering relief to beleaguered power projects.
These initiatives will revive investor interest in the power sector—otherwise a major infrastructure bottleneck that had begun to pose a drag on the economy.

On Monday, CERC released orders reordering the incentive structure for the state-owned power generation companies such as NTPC Ltd. Accordingly, incentives will now be based on the metric of plant load factor (PLF) and not plant availability factor (PAF), as it was previously.

PAF measures the generation capacity that is available, whereas PLF is based on the actual power that is generated at the plant. Effectively, CERC has linked future financial incentives with the purchase of power by distribution companies (discoms).
Since distribution utilities are strapped for funds, often the PLF is lower than the PAF—implying that NTPC would be entitled to fewer financial incentives, resulting in the immediate fall in share prices of the company on Monday.
NTPC’s core business is generation and sale of electricity to state electricity boards.
Electricity discoms owned by the state governments owe a staggering Rs.2 trillion to lenders. This has reduced their ability to buy power; lower demand for power translates to a lower PLF.

The latest order comes in the backdrop of CERC’s orders last week where it 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 on account of coal imports becoming more expensive.

The order is significant as it opens the door to compensation for other power projects that have run into similar problems due to a seemingly unexpected turn of circumstances, especially with respect to fuel costs.
This order also comes in the backdrop of the Union government working on a so-called peaking power policy that may provide for up to five-year contracts and a pass-through of fuel price increases to help these projects become economically viable.
CERC’s multi-year tariff regulations for projects affect those companies that employ the business model based on an assured return on equity (RoE) and are applicable during financial years 2015-19.

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 11.43% to Rs.117.05 on Monday. The benchmark Sensex rose 0.53% to 20,811.44 points.

The order also linked the 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 retain 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. 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.

At the same time, the regulator has also reduced auxiliary consumption of power from 21.5% to 12.5%. Auxiliary consumption is energy consumed by the power generation company and is included as compensation in the tariff.
Not only will the power producer have to invest in more efficient energy use technology, it will also reduce the carbon footprint and hence make it relatively less harmful for the environment.

An NTPC spokesperson in an emailed response termed the order “positive”.
Analysts differed.

“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 penalize 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 on Monday. “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 233,930 megawatts (MW), 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 proposes to increased capacity to 128,000MW by 2032.
In a separate development, CERC, dismissing the findings of an investigation, has ordered that notices be issued to those responsible for triggering India’s worst power outage in 2012.

“Accordingly, we find that the SLDC (state load dispatch centres) of Haryana, Uttar Pradesh, Punjab, Rajasthan, Maharashtra, Gujarat, Madhya Pradesh, Chhattisgarh as well as Power Grid, WRLDC (western region load dispatch centre), NRLDC (northern region load dispatch centre) and NTPC have failed to comply with provisions of the Electricity Act 2003 and various regulations,” CERC wrote in its order.

The report by the committee headed by A.S. Bakshi, chairman of the Central Electricity Authority (CEA), India’s top power sector planning body, blamed the outage on a dangerous imbalance—too much power being drawn by northern states such as Uttar Pradesh, Punjab and Haryana and too little of it by those in the west.
“The report of the enquiry committee constituted by the MoP (ministry of power) was submitted hurriedly in very short time span of 15 days,” CERC said.

CERC separately has asked Reliance Power Ltd (R-Power) to submit documents to support its claims for compensation on account of an unforeseen depreciation in the rupee. The next hearing is on April 17.
R-Power has been the most successful company in terms of winning contracts to develop so-called ultra-mega power projects, which are projects capable of generating 4,000MW or more. Of the four awarded till date, it has been the successful bidder for coal pithead projects at Sasan in Madhya Pradesh, and Tilaiya in Jharkhand, and the imported coal-based project at Krishnapatnam in Andhra Pradesh. The imported coal-based project at Mundra in Gujarat was won by Tata Power.
An R-Power spokesperson in an emailed response said, “Reliance Power welcomes the order of the Hon’ble CERC recognizing that the unprecedented and unforeseen foreign exchange rate variations beyond the control of the company and beyond the normal expectations may need to be considered for quantification and compensation by the procurers appropriately.”
Ami Shah in Mumbai contributed to this story.

Reliance Power has sued HT Media Ltd, publisher of Mint, in the Bombay high court over a 12 May 2010 front-page story in Mint that it disputed. HT Media is contesting the case.

Source: www.livemint.com