With Solar sector rapidly developing and the overall renewable becoming the cheapest form of new power generation, Morgon Stanley has downgraded its industry view of Indian power utilities.
In the report titled “Renewable Energy: What Cheap, Clean Energy Means for Global Utilities” Morgan Stanley downgraded the India Utilities to “In-Line” from “Attractive”.
“Solar power will, in our view, pressure power prices and damage margins for merchant (i.e., unhedged) generators, along the lines of what has occurred in California”, states the report.
Amongst the negatively exposed to renewable are NTPC and Adani Power, who are not pricing enough, amongst the disruption brought in by renewable.
“Although NTPC is a regulated utility with a generation business, the company is likely to disappoint on commissioning new coal plants, premised on belief that economics favour future solar additions vs. coal, implying risk to earnings growth”, notes the report, mentioning that the company offers low pipeline visibility for solar and would potentially miss out on the huge upside opportunity from the renewable expansion, given its non-competitive nature of bidding.
For Adani power, Morgan Stanley views that with almost 9% of capacity of merchant capacity, the already high leverage business is magnified, given the falling price of solar.
With the government announcement of no new coal capacity being added over the next five years, the opportunity for equipment replacement will dry up, placing Bharat Heavy Electrical (BHEL), with an ‘Underweight’ rating.
Tata power and Power Grid Corporation of India Limited (PGCIL) on the other hand stand upgraded from ‘Equal-weight’ to ‘overweight’ based on their thrust toward clean energy.
“We favour PWGR which is well positioned to capture the opportunity of building new green corridors connecting to future renewable capacity. It also does not face any tariff risk. Tata Power has large renewables capacity (28% of its capacity), earning a large proportion of its profits as regulated return and maintains attractive upside from future renewables investment”, mention the report.
The experts view that with the recent solar “economic inflection point”, there is a huge possible of Indian utilities to begin announcing larger renewable energy growth initiatives.
The most exposed to the competitive pressure, among the merchant generators is JSW. The load factor at several JSW plants will continue to face pressure given the improving transmission connectivity, delivering low-cost power from other states and the squeezing prices of the PPAs (Power Purchase Agreement) with solar disruption.
Overall, India stands most exposed to the changing dynamics, with solar replacing domestic coal as the lowest cost power generation resource and will continue to pressure power prices with rising technology in battery storage.
“While there is still some debate around the sustainability of the recent solar bids and the underlying assumptions, it is clear that over the next few years, the state electricity board will think hard before signing even short or medium term coal-based PPAs given that solar has achieved grid parity and PPAs using domestic coal always face inflation risk”, notes the report.