India Ratings and Research (Fitch Group) – Draft CERC Regulations FY19-FY24 – Favourable for Generators
Ind-Ra-New Delhi: India Ratings and Research (Ind-Ra) opines that the draft Central Electricity Regulatory Commission (CERC) guidelines for the FY19-FY24 block period are favourable for power generators, as the regulator has maintained the status quo on most of the parameters as against Ind-Ra’s expectation of a lower return on equity and change in debt:equity (D:E) ratio in favour of debt.
Ind-Ra estimates the annual fixed cost to decline by 1.4%, as per the new guidelines, largely driven by the changes in the working capital norms. CERC has tightened the working capital norms by lowering the normative inventory and receivable period allowed by 10 days and 15 days, respectively. Moreover, the regulator has changed the rate of interest on working capital to one year MCLR+350bp as against the earlier guideline of SBI base rate +350bp. Both the factors combined are likely to lower the interest on the working capital component. Additionally, CERC has lowered the arbitrage available to generators on the late payment surcharge by lowering the late payment surcharge rate to 1.25% from 1.5%.
However, there will be an increase in the billable energy charge rate, driven by i) an increase in normative auxiliary energy consumption ii) an allowance of additional 85kcal/kg GCV loss on account of variations during storage at generating stations and iii) an increase in the normative allowance in transit losses. Ind-Ra expects the energy charge rate to increase by 6 paisa/kWh under the new tariff guidelines.
In the proposed norms, CERC has reduced the normative availability to 83% from 85%, which would improve fixed cost recovery. However the basis of declaration has been changed to quarterly from annually. As per the guidelines, under-recoveries in a quarter cannot be recovered in the later part of the year.
As against the earlier expectations of an increase in the leverage ratio of generators on account of an expected decline in return on equity, EBITDA and increase in D:E ratio, Ind-Ra expects no major impact on the leverage profile as the overall impact on EBITDA remains neutral with no change in the proposed D:E ratio. Ind-Ra believes that any decline in aggregate revenue requirement due to working capital changes is likely to be offset by higher energy charges as allowed under the new guidelines.
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