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Wednesday, March 25, 2015
Fixed cost recovery can be a mirage for power sector coal block winners
[Editor: I have told this long back, through my numerous Facebook posts, that if the government of any country loots the power companies, in the name of auction, then the consequences would be too hard. This is a natural fall-out of wrong-governance, by Narendra Modi & Co. Anway, now I want to know the views of those in the media who were tom-toming about the low cost of power]
TUE, MAR 24 2015: Aggressive bids by power generation firms for coal blocks have got investors worried. Rating agency Crisil Ltd’s calculations show that for coal block winners who had bid the highest and have a combined capacity of 10,000 megawatts (MW), there will be cost under-recovery totalling Rs.1,350 crore in the next fiscal year. Variable cost under-recovery is estimated at around 65 paise per unit. The under-recoveries of some power companies are estimated to be even higher.
For Jaiprakash Power Ventures Ltd, it is pegged at 97 paise per kilowatt hour (kWh) and for Essar Power, which won Tokisud North coal block, it is likely to be more than Rs.1 per kWh. The impact varies depending on power purchasing agreements (PPAs).
Companies which are yet to tie up their capacities will be on a better footing simply because their fuel security improves and they stand a chance of negotiating the contracts on beneficial terms.
“We believe this (coal mine win) is positive for GMR only because it currently does not have a PPA for the project and it has the flexibility to load it up on to the fixed cost while participating in the case 1 bids under section 63,” an Antique Stock Broking Ltd note said.
Section 63 determines tariff through bidding process. But that is easier said than done. As widely feared, if the government caps the fixed cost and does not allow cost escalation to go through, then the companies will have a tough time recovering them. Another factor is competition.
The weak financial condition of state electricity boards, the biggest buyers of electricity in India, means they are not keen on signing many PPAs. With ample idle capacities, higher competition will limit tariffs, weighing on cost recovery.
“As per our estimates, 22-25GW (gigawatts) of power projects—both operational and expected to be commissioned by 2016-17—are untied and will compete for new PPAs. State discoms, however, have signed just about 8.5GW of long-term PPAs in the last 3 years because of stretched financials, large capacity of existing PPAs, and sluggish power demand.
This will restrict any sharp increase in fixed tariffs,” Rahul Prithiani, director, Crisil Research said in a statement. One GW equals 1000MW. Not surprisingly, investors have been circumspect.
The S&P BSE Power index which has been trailing the broader markets for a year before the coal block auctions continues to underperform the benchmark index (S&P BSE 500). CESC Ltd has lost 14% from the pre-auction levels. While Jaiprakash Power Ventures losses are insignificant at 1.6%, GMR Infrastructure Ltd is down 17% from 13 February.
The writer doesn’t own shares in the above-mentioned companies.
Courtesy: Live Mint