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BW Businessworld

Pulling The Plug On NTPC?

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Before 10 december 2013, NTPC chairman
Arup Roy Choudhury, in all his public interactions, preferred to talk about the plant availability factor (PAF) of his plants rather than the plant load factor (PLF). The reason being incentives for power generation were linked to PAF and not PLF. But all this changed post-10 December when the Central Electricity Regulatory Commission (CERC) came out with its draft tariff regulations for the period 2014-19. The NTPC stock tanked over 11 per cent in a single trading session.

Such was the measure of panic that the company called a press conference the day after where Choudhury made an attempt to allay fears about the consequences of the CERC draft. “There is always a significant difference between the draft and the final version of tariff regulations. There is no need to panic,” he told reporters. He added that the regulator’s proposal to link incentives to PLF was a mistake. “Even CERC knows that PLF has no value in our business. We will present our views to the commission,” he said.

Famous last words! When the final guidelines came out on 24 February, NTPC along with many other power producers operating on the cost-plus model — where costs of material, labour, overheads are added to a markup percentage — were in for a bigger shock. The regulator had, in addition to a host of stringent norms, withdrawn tax benefits enjoyed by firms that followed the cost-plus model. NTPC’s stock plumbed to a five-year low.

NTPC moved the Delhi High Court 10 days later to seek a stay on the order which, according to the company, would make cost-plus generation unviable. Even though the court refused to stay the order, it asked CERC to file an affidavit justifying the regulations. At the next hearing on 19 May, CERC made a plea for more time. A hearing is scheduled for 24 July.

NTPC operates 23 coal-fired power plants with an aggregate installed capacity of 42,464 MW. The company accounts for around 18 per cent of India’s thermal power generation. Interestingly, the CERC regulation has brought together — for the first time — two otherwise warring parties, namely, NTPC and the Association of Power Producers (APP) which represents 22 private power developers that also follow the cost-plus model. Though both parties have filed separate writ petitions against the regulator, the high court has decided to take the petitions up together.

The Sticking Points
The CERC order mandates that the station heat rate (SHR) — a term for calculating the amount of heat required to generate one unit of electricity — should be computed on an ‘as received’ basis rather than on an ‘as fired’ basis. “Any arbitrary practice of using ‘as fired’ gross calorific value (GCV) for SHR calculations without proper guidelines for determining the same will only lead to inflated claims of coal consumption,” reads the order.

The regulator, to buttress its argument, has quoted from a Central Electricity Authority report which, in turn, bases its findings on illustrations from international publications. The report estimates the maximum loss of just 3 per cent in the calorific or heat value of coal after 10 days storage — or about 3 Kcal/Kg for an ‘as received’ coal consignment with a GCV of 3,500 Kcal/Kg.

However, NTPC, in its petition filed before the high court, claims that “it is not feasible to measure the GCV of incoming coal with reasonable accuracy when it is still on the wagons, prior to its crushing and removal of foreign material, etc”. It further states: “The best practices to monitor GCV of coal requires that coal be crushed to below 50 mm size which, on a routine basis, is done in the power plants.”

APP, on its part, also points in its petition that the guidelines related to GCV did not form part of the draft issued in December 2013. “The CERC seems to have picked up recommendations of a report prepared by the Central Electricity Authority without consulting stakeholders. How can you bring in the regulation without discussing its impact with the parties involved,” asks Ashok Khurana, secretary general, APP.

In its petition, APP claims, “It is pertinent to point out that CERC did not propose the change in methodology of determination of GCV in the Draft Tariff Regulations 2013, published as per the requirements of Section 178 (3) of the Electricity Act to provide an opportunity to the stakeholders to make comments and suggestions.”

Khurana goes on to state that “this is the first time that CERC has not come out with a statement of reason (SoR) even a month after issuing its tariff order. Usually, the practice has been to publish the SoR within two to three days of issuing an order”.

Anil Razdan, former secretary, Ministry of Power, offers a balanced perspective. “Not giving prior notice may be a reason for re-opening the case. There is merit in the argument of NTPC and other power companies. But there is also merit in the argument of CERC that ‘what you receive is what you receive’. If you allow the quality of coal to deteriorate, then, you should be responsible for it.”

On the issue of SHR, the CERC regulation stipulates a reduction of 50-75 Kcal per unit of electricity generated. This is applicable to plants of 200, 500 and 660 MW capacity. A 200 MW plant, for instance, uses 2,500 Kcal at present to produce one unit of electricity. It will now require 2,450 Kcal to produce the same power.

NTPC argues that SHR of a power station is a function of PLF. Higher the PLF, better the SHR. In the past two years, PLF of all plants across the country has come down for reasons beyond the control of the power producers. “In the Tariff Regulations 2014, CERC has determined the applicable SHR without providing for any margin and based on an average of actual operational values observed in the last 5 years… In the later years (2011-13), there was a significant reduction in the demand for electricity and the generating stations were operating at a low PLF,” reads the NTPC petition. NTPC’s PLF (see Losing Steam) has come down by close to 10 per cent since 2009. The Central Electricity Authority, while making its recommendations to CERC, had used a weighted average of PLF of NTPC’s best performing plants.

NTPC has argued that over the past two years, power producers were finding it difficult to maintain a high PLF because of low fuel availability. Besides, even the new fuel supply agreements being inked assure only 65 per cent of fuel requirement. Further, the burgeoning of solar and wind projects has seen discoms preferring to draw power from them whenever they generate electricity, leading to lower demand from thermal power plants.

Another CERC regulation that is worrying cost-plus power producers is the linking of incentives to PLF and not PAF as is the practice. PAF measures the generation capacity available, whereas PLF is based on the actual power that is generated at the plant. According to the new rules, an incentive of Re 0.5/Kwh will be given if the normative PLF is achieved. In case the company does not achieve the PLF, it will be penalised.

According to Pramod Deo, former chairman, CERC, the norm will ensure that discoms pay incentives only for the power that they take from producers. This, in turn, will lead to lower tariffs and help improve the financial situation of discoms. However, the regulation will lead to a substantial loss of revenue for power producers. NTPC, for instance, will lose Rs 140 crore a year for every 1 per cent dip in PLF, says Deo.

NTPC said the change in incentive payment would only benefit discoms and not consumers. All its capacity addition plans were based on incentives for PAF. In the absence of such incentives, capacity addition would suffer, impacting consumers.

Another regulation that hurts cost-plus power producers is the withdrawal of tax arbitrage. Under the new dispensation, discoms will reimburse the tax that producers pay on the applicable 15.5 per cent return on equity (RoE), instead of the normative corporation tax earlier.

Currently, some power producers enjoy a tax holiday in certain stations, paying just the minimum alternate tax of 20 per cent instead of the 33 per cent corporation tax. However, they are reimbursed by discoms at the rate of 33 per cent. The new rules will deprive NTPC and other generators of this tax arbitrage. As a result, NTPC stands to lose about 5 per cent in its post-tax return on equity. This would bring its FY15 earnings down by 6-7 per cent.

This rule will hurt investors the most. According to Deo, “NTPC was the best bet for investors as it earned more than the mandated cost-plus rule of 15.5 per cent of RoE. So, if the regulator withdraws that amount, they will definitely be hurt.” Razdan, on the other hand, says the regulator had done the right thing in withdrawing the tax arbitrage. “The onus is on the regulator to try and minimise the cost of power. The regulator should look to balance the health of generators, discoms as well as consumers. If only the generators make money, then the discoms as well as the consumers will not be in a position to buy power in future. This will affect the sector in the long run.”

According to data from the Power Finance Corporation on the performance of state power utilities from 2006-07 to 2011, the cost of purchasing power forms 61.62 per cent of the total expenditure of discoms. Besides, the purchase cost of power for discoms has increased at a CAGR of 16.42 per cent in the same period. In the case of Delhi’s discoms, the cost of power has gone up by more than 100 per cent in the past three years due to the increased cost of fuel which is passed on by power producers.

Says Kuljeet Singh, partner, EY: “The regulator has committed the mistake of bringing in the right regulations at the wrong time. At this point in time, no private player is interested in the power sector because of various hurdles. Bringing down the tax benefits of power developers will only make investors shy away from the sector.”

The Philosophy
Girish Pradhan, chairman, CERC, did not speak to BW. His predecessor Deo helped decode the philosophy behind the ‘harsh’ order. “The government wants to encourage companies to take up projects through competitive bidding. NTPC has made enough profits through its cost-plus projects. We need investments in competitive projects that will see investment from the private sector.”

On being asked whether future investor sentiment will be hurt by these rules, Deo says: “There is just about 14,000-20,000 MW of capacity under the cost-plus model that is in the pipeline. This isn’t significant. The future is in competitive bidding and the regulator is giving incentives to promote investments in the sector.”

(This story was published in BW | Businessworld Issue Dated 30-06-2014)