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Draft Tariff Norms Spark Worries Over Power Grid, NTPC Earnings

Draft Tariff Norms Spark Worries Over Power Grid, NTPC Earnings

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Stocks of Power Grid Corporation of India Ltd. and NTPC Ltd. have fallen 3-7 percent over the past month on fears that the government may bring down regulated returns for conventional utilities.

The fears stem from the Central Electricity Regulatory Commission’s (CERC) draft tariff guidelines on renewables that propose to lower the regulated post-tax rate of return to 14 percent from 15.5 percent now, according to a report by Kotak Institutional Equities.

The market fears a similar reduction in the tariff of conventional utilities when it comes up for renewal in 2019 and is likely pricing in the risk of an 8-10 percent downward revision in their earnings for financial year 2019-20, the report said.

Emailed queries to Power Grid and NTPC seeking a comment did not elicit a response.

Limited Impact On Renewables

The draft guidelines are limited to assets sold under the cost-plus tariff method – under which utilities charge a price that factors in their cost and a certain return. Kotak expects the impact of these guidelines to be limited in the near term as there are very few renewable assets that sell power under this method.

Solar assets are auctioned through competitive bidding and are excluded from cost-plus tariff method.

Incremental assets in wind power were also sold via competitive bidding recently, said Vivek Jain, associate director at brokerage India Ratings. There is an increasing possibility that incremental capacity in future will also be largely added through competitive bids, Jain said.

So these guidelines and calculations could be a futile exercise, he said.

The total renewables capacity in India stood at 50,018 megawatt (MW) as on December 31, 2016, of which 28,700 MW was wind power.
Equipment Suppliers May Feel The Sqeeze

Usually, a squeeze in the expected return on a project leads to hard bargaining between developers and equipment suppliers, said Jain.

A lower rate of return for producers would have a cascading impact on manufacturers of wind turbines or equipment suppliers, said Harshvardhan Dhole, research analyst at brokerage IIFL Institutional Equities.

Source:bloomberg
Anand Gupta Editor - EQ Int'l Media Network

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