Power Sector Update | Power & Utilities

March 12, 2019

Power Sector Update

CERC Power Tariff FY2020-24 Regulation

Central Electricity Regulatory Commission (CERC) has finally released the final

regulations on the Power Tariff Regulation for FY2020-24. Final regulations favor

promoting the economical drivers in the sector and has put to rest all the fears like

regulated ROE being reduced for the sector by 1% amongst others. These regulations

shall come into force on April 1, 2019, and unless reviewed earlier or extended by the

commission, shall remain in force for a period of five years from FY2020-24. These

regulations will be positive for the power sector and will benefit NTPC as the main

concerns that the draft paper raised have been put to rest by the final regulation. Thus,

while we are cautious on the power sector given the various concerns, we maintain our

BUY on NTPC as the stock provides a good opportunity; given its profitability is

better insulated to industry dynamics. In addition, the stock at current valuations

discount most of the concerns.

CERC Power Tariff Regulation FY2020-24

Salient features for power Generators

 Base ROE for Power generators remained same: According to the

regulation, return on equity (ROE) shall continue to be computed at the base

rate of 15.50% for thermal generating station, transmission system including

communication system and run-of river hydro generating station, and at the

base rate of 16.50% for the storage type hydro generating stations including

pumped storage hydro generating stations and run-of river generating station

with pondage. This was against the draft paper, which indicated that RoE cut

might be limited to 1% and that there will be different ROE for transmission

vs. generation assets.

The base rate of return on equity as allowed by the Commission under

Regulation 30 of these regulations shall be grossed up with the effective tax

rate of the respective financial year. For this purpose, the effective tax rate

shall be considered on the basis of actual tax paid in respect of the financial

year in line with the provisions of the relevant Finance Acts by the concerned

generating company or the transmission licensee, as the case may be.

The actual tax paid on income from other businesses including deferred tax

liability (i.e. income from business other than business of generation or

transmission, as the case may be) shall be excluded for the calculation of

effective tax rate.

Additionally, to enhance the productivity of the assets plants will have to

ensure ramp rates of 1% per minute else, they will lose RoE of 0.25%. A higher

than 1% ramp rate will earn 0.25% additional RoE, subject to a cap of

additional 1%.

Please refer to important disclosures at the end of this report

Power Sector Update | Power & Utilities



2-level structure for Power Tariff continues: There is no change in the

computation of the Capacity Charges ( ROE, Interest on loan capital, Depreciation,

Interest on working capital and O&M expenses) and Energy charges (Landed Fuel

Cost of primary fuel Cost of secondary fuel oil consumption; and Cost of limestone

or any other reagent, as applicable).



Useful life for Hydro power plant has been increased to 40 years (from 35 years

earlier).



Capacity Charges linked to a PAF of 85%, with some modification: Full

recovery of Capacity charges as long as PAF>85%; Recovery of capacity charge on

seasonal basis and introduction of peak and off peak capacity charge. The capacity

charge shall be recovered under two segments of the year, i.e. High Demand

Season (period of three months) and Low Demand Season (period of remaining

nine months), and within each season in two parts viz., Capacity Charge for Peak

Hours of the month and Capacity Charge for Off-peak Hours of the month as

follows. Availability will also be monitored for peak hours (4-hour) and non-peak

hours (20-hour) of each day. Any gap in availability during high demand and peak

periods will not be allowed to be recouped by higher availability during low

demand and non-peak season. The recovery of fixed charge, which is based on

availability of plants, has thus become stringent. The provisions under this

regulation shall come into force with effect from FY2021.

Till the Regulations comes into effect , the capacity charge for a thermal generating

station determined under these regulations shall be recovered in accordance with

the provisions contained in Regulations of the Central Electricity Regulatory

Commission (Terms and Conditions of Tariff) Regulations, 2014, subject to the

condition that the NAPAF and NAPLF shall be taken as specified under these

regulations.



Debt: Equity for a power project still at 70:30: For a project declared under

commercial operation on or after April 1, 2019, the debt-equity ratio would be

considered as 70:30 as on COD (Date of commercial operations). If the equity

actually deployed is more than 30% of the capital cost, equity in excess of 30% shall

be treated as normative loan provided that:



where equity actually deployed is less than 30% of the capital cost,

actual equity shall be considered for determination of tariff:



The equity invested in foreign currency shall be designated in Indian

rupees on the date of each investment:



Any grant obtained for the execution of the project shall not be

considered as a part of capital structure for the purpose of debt: equity

ratio.



provided that in case of a generating station or a transmission system

including communication system which has completed its useful life as

on or after 1.4.2019, if the equity actually deployed as on 1.4.2019 is

more than 30% of the capital cost, equity in excess of 30% shall not be

taken into account for tariff computation.

The repayment for each of the year of the tariff period 2019-24 shall be deemed

equal to the depreciation allowed for the corresponding year/period. In case of

March 12, 2019

Power Sector Update | Power & Utilities

de-capitalization of assets, the repayment shall be adjusted by taking into account

cumulative repayment on a pro rata basis and the adjustment should not exceed

cumulative depreciation recovered upto the date of de-capitalisation of such asset.

The rate of interest shall be the weighted average rate of interest calculated on

the basis of the actual loan portfolio after providing appropriate accounting

adjustment for interest capitalized.

Bank Rate for interest on working capital means the base rate of interest as

specified by the State Bank of India from time to time or any replacement thereof

for the time being in effect plus 350 basis points.



Working Capital norms Stringent: Working capital receivable - 45 days, O&M -

1 month, cost of coal - 10 days for pithead, 20 days for non-pithead. This was

against Working capital receivable - 2 months, O&M - 1 month, cost of coal - 15

days for pithead, 30 days for non-pithead.



Financial gains to be shared because of controllable parameters (SHR, aux and

secondary fuel oil cons) to be in 50:50 ratio between generator and consumers

compared with 60:40 earlier.



Sharing of gains related to restructuring of loans to be in the ratio of 50:50 between

generators & consumers V/s 1:2 earlier.



Depreciation charges would be charged on straight Line Method at specified rates

higher for 12 years and at lower rate thereafter.



O&M expenses hike in line with draft: Basic O&M expenses increased by 9-10%

over FY2019, which is positive. Annual inflation in O&M allowance was, however,

cut from the ~6.3% earlier to 3.5% mostly in line with the draft paper. The water

charges and capital spares for thermal generating stations shall be allowed

separately.



The Special Allowance admissible to a generating station shall be @`9.5 lakh per

MW per year for the tariff period 2019-24.



Normative Annual Plant Availability Factor (NAPAF) all thermal generating stations,

except those covered under specific provisions is 85%.



Gross Station Heat tweaked in a minor way : Gross Station Heat Rate Existing

Coal-based Thermal Generating Stations, other than those covered under clauses

(ii) and (iii) is : for 200/210/250 MW Sets and 500 MW Sets (Sub-critical) sets

2430kCal/kWh and 2390 kCal/kWh respectively. For the generating stations having

combination of 200/210/250 MW sets and 500 MW and above sets, the normative

gross station heat rate shall be the weighted average gross station heat rate of the

combinations. This is minor positive than earlier provisions.



Auxiliary Energy Consumption for Thermal plants for 300/330/350/500 MW and

above is ~8.0%.



Gross Calorie Value (GCV) Allowance: CERC has provided the allowance of loss

of 85kCal/GCV between unloading and firing point. Note that NTPC faced 5-6%

under recovery on fuel due to from firing point to unloading point. The regulation

is expected to remove entire under recovery because of fuel cost. This will enhance

the net profit of the company by `800cr.

March 12, 2019

Power Sector Update | Power & Utilities

 Incentive linked to PLF> 85percentage; peak hours - 65 paise/Kwh & off peak hours

- 50 paise/Kwh.

 Older plants to continue to function: In respect of a thermal generating station

that has completed 25 years of operation from the date of commercial operation,

the generating company and the beneficiary may agree on an arrangement,

including provisions for target availability and incentive, where in addition to the

energy charge, capacity charges determined under these regulations shall also be

recovered based on scheduled generation. (2) The beneficiary shall have the first

right of refusal and upon its refusal to enter into an arrangement as above, the

generating company shall be free to sell the electricity generated from such station

in a manner as it deems fit.

Thus, in case of plants that have completed their useful life and where regulated

equity was more than 30% of project cost; will be reset to 30%. This affects NTPC for

some of its old plants. However, the provision is significantly better than the draft

tariff regulations, which had called for a write-off of regulated equity of old plants

to ~5%. Though overall positive, it will be marginally negative as NTPC has some

plants operating at 50:50 Debt: Equity.

Outlook

Overall, the regulations have not played out the fears that the draft mentioned and

hence provided a relief to the sector; which is already plaguing with many concerns on

the supply front; like oversupply of over, stressed assets, lack of fuel availability etc.

Thus, with this regulation out, now the investment picture for investors and power

companies is clear at least until FY2024. Currently we have a very cautious view on the

space and have been recommending only NTPC as a good value pick, which has all the

right levers to deliver returns to shareholders in the next 3-4 years. Thus, with this

regulation, the concern over reduction in the ROE and shutting down the older

power plants which would have effected NTPC have been allied and the regulation

in our estimate will enhance the EPS by 3-4% in FY2020. Hence, we reinforce our

buy recommendation with a price target of `194.

March 12, 2019

Power Sector Update | Power & Utilities

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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NTPC India

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or

relatives

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Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

March 12, 2019