Utilities: CERC’s balanced tariff proposals

5 Jan 2024 , 11:08 AM

An additional 50 basis points ROE for select new hydro assets, and a 50 basis points cut in ROE for new transmission projects; proposals include better incentive structure for IPPs to set up power supplies; as such analysts at IIFL Capital Services like the draft; and have maintained a positive stance on a NTPC, Torrent, CESC.

Draft tariff regulations for 2024-29

CERC’s draft tariff regulations propose -1) to keep ROE on all operating assets (thermal, hydro, transmission, etc) unchanged; 2) for new hydro IPPs with storage option and transmission assets (CoD>FY25), ROE has been hiked/cut by 0.5% respectively; 3) higher incentives for IPPs (thermal, hydro), provided certain norms are met; 4) tighten the benchmark O&M for gas and transmission assets; 5) ~6% pa escalation in O&M charges versus prevailing 3.5% pa; 6) 14% ROE on mining infra. CERC has invited comments from stakeholders by 10^th Feb 2024; these are relevant for utilities, where tariff is determined by the CERC, and be valid through 1^st April 2024-31^st March 2029, when finalized.

Balanced proposals

The draft is fairly balanced, as it offers stability on the regulatory framework for all operational units; through a favorable incentive structure CERC has tried to improve risk reward for hydro IPPs; moreover analysts at IIFL Capital Services like the approach to be realistic in the assessment of inflation in benchmark costs; these should allow better cost recovery. In all, analysts at IIFL Capital Services think the draft regulations to be balanced and address needs of the hour – attract fresh investments in the sector. As per MoP, India needs at least 80GW new thermal, ~400GW RE capacity, and Rs3.5-4tn transmission investments by FY32, to meet energy demand.

Maintain positive stance on sector

Underpinned by underinvestment across the chain, analysts at IIFL Capital Services think, sectoral fundamentals have turned favorable towards industry versus consumers; the CERC’s draft recommendations seem to signal the same; and to that extent, they have retained their positive stance on the sector. Analysts at IIFL Capital Services think aggressive distribution reforms are now necessary by the respective states. On that backdrop, they like NTPC, Torrent Power, and CESC the most, and await better entry point for PWGR and NHPC.

Key draft recommendations: 1. ROE for operational G/T unchanged at 15.5%; hydro at 16.5%; 2. New hydro with pondage units to earn 0.5% extra ROE (17%); new transmission assets to earn 0.5% less ROE (15%); 3. Benchmark PAF for thermal IPPs >30 yrs old down to 80% vs 85%; PAF for CFBC lignite units cut to 75%/69% vs 80%/75% (0-3 yrs); 4. For thermal IPPs, Paise 10/unit extra incentive for generation above normative levels (85% new/80% old) during peak hours; 5. Hydro: paise50/unit incentive for surplus generation in peak time; higher incentives (2% of AFC) for grid frequency mgmt.; 6. Higher transit losses during coal transportation (1% vs 0.8%); 7. Marginal reduction in SHR for thermal IPPs; 8. Approximately 15% cut in O&M benchmark for gas IPPs; approx. 5-7% tightening of O&M norms for transmission projects; 9. Lower normative WC prescribed for gas IPPs; 10. Marginal cut of 25bps in interest on normative WC Source: CERC