Power sector continues to face challenges; given the falling thermal PLFs, rising subsidy for state owned distribution utilities & uncertainty over resolution of tariff compensations for the affected private sector IPPs…
Energy deficit level drop significantly in FY 2014 with slowdown in energy demand & sizeable capacity addition: Against a CAGR of 7% between FY 2005 till FY 2013 in energy demand on all India basis, energy demand growth dropped considerably to 0.7% while energy availability improved by 6% in FY 2014. As a result, both peak and energy deficit levels came down sharply in FY 2014 to 4.5% and 4.2% respectively against 8.7% and 9.0% in FY 2013. Further, peak and energy deficit during Q1’ FY 2015 stood at 3.7% and 4% respectively. The decline in energy deficit levels is a result of subdued demand from industrial consumers (which contribute about 40% of overall demand in the country), constraints in off-take by state owned distribution utilities (which results into load-shedding & thus, restrained demand) and improved energy availability on account of sizeable capacity addition in the thermal segment as well as factors such as higher generation from hydro/ wind sources. Overall capacity addition in thermal segment in last two fiscals stood at 36,890 MW which in turn accounts for 22% of installed thermal capacity as on March 2014.
Deteriorating PLF levels in thermal segment; demand recovery & improvement in the financial position of state utilities remain key: Thermal PLFs at an all India level have declined to 65.6% during FY14 from 69.9% in FY13, primarily due to backing down of generation units due to low demand from distribution utilities as well as a fall in generation from gas based power plants following stoppage of natural gas availability from KG basin of RIL since March 2013. For gas based power plants, PLF level has declined to 24.9% for FY14 from that of 40.3% in FY13, which itself was significantly lower than the 66.2% observed in FY11. In case of coal based stations too, PLF levels varied widely and showed a mixed trend across generating stations driven by a) the cost-competitiveness of power generated, b) extent of fuel availability and c) availability of PPA, which allows the pass-through of cost in consent with distribution utility. For any sustainable improvement in PLF levels, demand recovery from the industrial consumers & more importantly, improvement in the financial position of state utilities remain critical. Also, on all India basis, the cost coverage ratio for distribution utilities still remain below 0.9 times.
Delays observed in many states for issuance of tariff orders, despite the satisfactory progress in filing of tariff petitions for FY 2015; Also, subsidy dependence continues to rise further: While tariff petition filing by the distribution utilities for FY 2014-15 have been done by the distribution utilities in most of the states, SERCs in 16 out of 29 states have issued tariff orders for FY 2014-15 so far. Delays in issuance of tariff orders by SERCs were seen mainly due to election code of conduct applicable to SERCs with Central Government elections in May 2014 and in turn, tariff order issuance by SERCs for FY 2014-15 is still pending for utilities in many states. Out of these 16 states where SERCs have issued tariff orders for FY 2015, SERCs in seven states namely Arunachal Pradesh, Bihar, Gujarat, J&K, Odhisa, Uttarakhand & Madhya Pradesh have not approved any tariff revision for the distribution utilities, while SERC in Himachal Pradesh, has approved a marginal tariff decline as a result of tariff rationalization. In case of other eight states, tariff revision allowed by SERCs has remained moderate i.e. in the range of 5-10% (except in Meghalaya where tariff revision remained at 15%). On all India basis, subsidy dependence for the state owned distribution utilities for FY 2014-15 is estimated in the range of Rs. 720 billion, which is estimated to have increased at CAGR rate of 16% since FY 2010. Among all the utilities, subsidy dependence for discom in Maharashtra is estimated to increase sharply by about 55% on y.o.y basis in FY 2015 as a result of tariff subsidy of 20% announced by State Government for 11 month period (Jan – Nov 2014), while the same for utilities in other states in FY 2015 is estimated to increase by 8 to 20%. In turn, timeliness & adequacy of subsidy support to utilities from their respective State Governments remains extremely crucial.
Timelines for resolution of compensatory tariff issue for affected IPPs based on imported coal remains uncertain ; Also, limited progress seen in case of allowing tariff compensation by SERCs for the affected IPPs based on domestic coal linkage: While CERC issued a favourable order allowing tariff compensation to Coastal Gujarat Power Ltd and Adani Power Limited (both having imported coal based projects), the affected state utilities have appealed against the same to the Appellate Tribunal of Electricity (ATE). In turn, timelines for resolution of this issue remains highly uncertain, which is an area of concern for the generation sector, in ICRA’s view. Further, there has been limited progress in case of allowing tariff compensation by SERCs for the affected IPPs based on domestic coal linkage. SERC in Maharashtra has in May 2014 allowed a tariff compensation to Adani Power Maharashtra Ltd (APML) w.r.t. one of its PPA (at contracted capacity of 800 MW) with state distribution utility in Maharashtra, given that captive coal block was cancelled for APML by Ministry of Environment & Forest, GoI resulting into a dependence on costlier sources of fuel (i.e. mix of tapering linkage & imported source of coal), however, the same order has been further appealed by MSEDCL. Further MERC recently (in July 2014) has approved the fuel compensatory charge framework for the aggregate affected capacity of 3265 MW owned by private IPPs and implementation of the same remains to be seen. While tariff compensation approval either by CERC or SERCs would enable such affected IPPs to mitigate the fuel price risks, majority of these IPPs also remain exposed to risk of under-recovery in fixed capacity charges which has been mainly due to escalation in the project cost with steep INR depreciation against the USD w.r.t. foreign currency debt availed and given that most of the bids by IPPs did not provide for pass through of forex variations; the fixed cost escalation is also due to factors related to change in law. In such cases, SERCs/ CERC are yet to issue any order allowing tariff compensation w.r.t. under-recovery in the capacity charge.
Subdued outlook on short term traded tariffs to continue in the near to medium term: Given the financial constraints for the state owned utilities in many of the states & slowdown in energy demand in relation to improved energy availability, ICRA notes that that average bilateral short-term tariffs (for contracts of upto 1 year) to continue to remain subdued at around Rs. 4/kwh in the near to medium term. This is also from the fact that SERCs in few states have put a cap on volumes as well as pricing (i.e. average Rs. 4-4.5/kwh) for purchase of power through short term trading sources. W.r.t. traded volumes on power exchange which constitutes about 3.3% of overall electricity generation in the country, average traded price levels have contracted by 21% to Rs. 2.88/unit in FY 2014 against the previous year. Also, synchronization of southern grid with rest of India with augmentation of capacity transfer remain favorable for the discoms in Southern states which would enable them to procure surplus power available from generating units in other regions and reduce the energy deficit levels in the region. With this, the spot traded price level for southern grid areas on the power exchange is expected to moderate from the current level by about Rs. 1.5~2/kwh over the next 12-18 month period though the extent of such decline will also be crucially dependent upon the availability of transmission corridor to Southern Grid.
Increasing constraints for allowing open access by utilities remain negative for short term trading and in turn for IPPs with un-tied up capacity: Increasing constraints are being observed for HT consumers who intend to avail open access, as seen recently from disallowance of permissions by state utilities in Maharashtra & Gujarat and invocation of Section 11 by State Government in Karnataka under the Electricity Act -2003. This coupled with the upward pressure on open access charges (as seen from a sharp rise in cross subsidy surcharge across some of the states as well as levy of additional surcharge as allowed recently by SERCs in few states such as Haryana & Gujarat) remain key challenges for implementation of open access. Thus with increased constraints in the open access, generation capacity having merchant/short term PPAs which require open access consent would be adversely affected. In addition to this, such merchant capacity remains exposed to both i.e. volatile short term tariffs and adverse movements in international coal price levels, given that such capacity is not eligible for domestic coal linkage. With slow progress in tie-up of long term PPAs by distribution utilities so far in last 2 year period, about 13,000~15000 MW of generation capacity in private IPP segment is currently without long term PPAs and thus remains exposed to risks arising from merchant power rates. Such merchant / untied up capacity is likely to increase further, if power procurement through long term PPAs by the distribution utilities does not improve, also given that about 40% of private sector owned coal based capacity expected to be commissioned during FY 2015 & FY 2016 is still without long term PPAs.
Utilities in states with higher dependence on hydro electricity remains exposed to risk of weak monsoon: Given that about 70% of all India hydro based capacity is in north and southern region, utilities in states such as Uttarankhand, Odhisa, Karnataka, Himachal Pradesh, Kerala & Meghalaya have relatively higher dependence on hydro power sourcing which varies between 20% to 80%. As a result, cost of power supply for utilities in such states remains highly exposed to risk of weak monsoon affecting water availability & hydrology related risks. Assuming 20% shortfall in sourcing of hydro power than approved by SERC which is met through costlier thermal sources, overall impact on cost of power supply for utilities in these states varies between 6% to 20%, resulting into an upward pressure on tariffs & subsidy.