Utilities: CERC’s balanced tariff regulations

18 Mar 2024 , 10:36 AM

In its tariff regulations (2024-29), CERC has maintained ROE for all operational assets, hiked/cut ROE by 50bps for all new hydro IPP with storage/transmission lines commissioning post April 1st , 2024, introduced incentives to boost base/peak power supply and reflected the underlying inflationary trends to improve the cost recovery. Analysts of IIFL Capital Services like CERC’s regulations, which will go a long way in attracting investments in the sector and offer energy supplies at reasonable rates. Analysts of IIFL Capital Services up NHPC’s FY25/26 EPS by 3-4%, and maintain forecasts for others; NTPC and Torrent are analysts of IIFL Capital Services top picks.

Tariff regulations 2024-29:

CERC in its tariff regulations applicable for CPSUs through FY25-29, has 1) maintained ROE on all operating assets (thermal, hydro, transmission) 2) increased ROE by 50bps for all new hydro IPPs with storage option 3) cut ROE on new transmission assets by 50bps 4) offered higher incentives for IPPs (thermal, hydro), provided certain norms are met  5) built in ~5.5% p.a. escalation in O&M charges vs the prevailing 3.5% p.a. 6) 14% ROE on mining infra. There are no material deviations vs draft regulations published in Jan’24.

Balanced regulations:

The regulations offer stability on the regulatory framework for all operational units; further, through a favourable incentive structure CERC has improved risk reward for hydro IPPs; analysts of IIFL Capital Services also like the approach to reflect underlying inflationary trends in benchmark costs which should allow better cost recovery. In all, analysts of IIFL Capital Services think the regulations are balanced and address the needs of the hour to attract fresh investments in the sector, and offer energy at a reasonable price. As per MoP, India needs ~88GW new thermal, ~350GW RE capacity, and Rs3.5-4trn transmission investments by FY32, to meet energy demand.

Maintain positive stance:

Analysts of IIFL Capital Services upgrade NHPC’s FY25-26 EPS by 3-4% and maintain forecasts for others. Underpinned by underinvestment across the chain, they think sectoral fundamentals have turned favourable towards the industry; CERC’s tariff regulations signal the same, for which analysts of IIFL Capital Services retain their positive stance. Analysts of IIFL Capital Services like NTPC and Torrent Power the most and await a better entry point for PWGR and NHPC. Analysts of IIFL Capital Services think aggressive distribution reforms are now necessary to ensure energy security