In an otherwise dull and down market yesterday, towards the fag end of the session, CERC came in as a small blessing. Thanks to CERC, the BSE Power Index ended up higher by 2%, led by gains in NTPC (4.7%), Tata Power (4.5%) and Power Grid (11.5%). This once again reiterates the fact that power is one sector in India, which is indeed recession proof. Investments in the power sector just cannot stop as there is the very real fear of India getting unplugged due to power scarcity. And when the growth rate as such is slowing down, surely lack of power need not add more fuel to the fire.
CERC or Central Electricity Regulatory Commission, is India’s apex power sector regulator which includes Power Grid, NTPC, Neyveli Lignite and it took everyone by surprise by announcing tariff regulations. It upped return on equity on power companies to 15.5% from the existing 14%, applicable on new projects from 2009 to 2014. There is also a reward for projects being completed on schedule – an additional 0.5% RoE, which is then at 16%. These tariffs are applicable to all private companies, be it under state or center, and it is now upto the state regulators to implement these new tariffs.
Profits will increase as this now provides an additional incentive to produce more power. The message being sent by CERC is that the more you produce, the more you will earn. So this method of providing incentive for the performance, rewarding efficiencies is an extremely well thought of strategic move. With interest going down on one hand and the CERC giving higher RoE, the new tariff’s does make the investment in the power sector more attractive.
And this move, to provide incentives and rewards to performers is expected to lure in more investment in the power sector. We do have companies investing in the sector, but the number of companies which show interest in the sector and are ready to invest could certainly go up further.
CERC has stated that the RoE will now be pre-tax, for which the base rate of 15.5% would be grossed up through the applicable tax rate for the company. This will, in turn, translate into nearly 23.5% post-tax return on the equity as against 21% previously. This will mean that new power generation companies which enjoy tax holidays would now get more advantage over the older power companies.
The AAD or Advance Against Depreciation has been removed but depreciation rates have been reworked to take care of the repayment of debt. CERC has increased depreciation rates to 5.28% from 3.6% for thermal power plants and 2.5% for hydro power plants.
These tariff norms would be applicable in deals which do not involve any competitive bidding like the UMPPs. Instead it would be applicable to deals which are negotiated between the power generation company and the state Govt. But yes, it will be applicable to projects of the private sector which have got the mega power project status. CERC has also mandated that only firms that have an availability level of at least 85% are eligible for the guaranteed ROE.
What does this mean for the power companies? This would naturally mean a boost to the bottomlines. Neyveli Lignite has stated that due to the change in the tariff norms, it could see an additional profit for the future projects seen at Rs.32.50crore. NTPC’s profits are expected to go up by another 12-15%. The bottomline of Power Grid is expected to show a surge of around 5-6% once these tariffs get implemented.
And what about the likes of Tata Power and Reliance Power? They will have to depend on the state govt regulator, the State Electricity Board to implement these changes.
CERC or Central Electricity Regulatory Commission, is India’s apex power sector regulator which includes Power Grid, NTPC, Neyveli Lignite and it took everyone by surprise by announcing tariff regulations. It upped return on equity on power companies to 15.5% from the existing 14%, applicable on new projects from 2009 to 2014. There is also a reward for projects being completed on schedule – an additional 0.5% RoE, which is then at 16%. These tariffs are applicable to all private companies, be it under state or center, and it is now upto the state regulators to implement these new tariffs.
Profits will increase as this now provides an additional incentive to produce more power. The message being sent by CERC is that the more you produce, the more you will earn. So this method of providing incentive for the performance, rewarding efficiencies is an extremely well thought of strategic move. With interest going down on one hand and the CERC giving higher RoE, the new tariff’s does make the investment in the power sector more attractive.
And this move, to provide incentives and rewards to performers is expected to lure in more investment in the power sector. We do have companies investing in the sector, but the number of companies which show interest in the sector and are ready to invest could certainly go up further.
CERC has stated that the RoE will now be pre-tax, for which the base rate of 15.5% would be grossed up through the applicable tax rate for the company. This will, in turn, translate into nearly 23.5% post-tax return on the equity as against 21% previously. This will mean that new power generation companies which enjoy tax holidays would now get more advantage over the older power companies.
The AAD or Advance Against Depreciation has been removed but depreciation rates have been reworked to take care of the repayment of debt. CERC has increased depreciation rates to 5.28% from 3.6% for thermal power plants and 2.5% for hydro power plants.
These tariff norms would be applicable in deals which do not involve any competitive bidding like the UMPPs. Instead it would be applicable to deals which are negotiated between the power generation company and the state Govt. But yes, it will be applicable to projects of the private sector which have got the mega power project status. CERC has also mandated that only firms that have an availability level of at least 85% are eligible for the guaranteed ROE.
What does this mean for the power companies? This would naturally mean a boost to the bottomlines. Neyveli Lignite has stated that due to the change in the tariff norms, it could see an additional profit for the future projects seen at Rs.32.50crore. NTPC’s profits are expected to go up by another 12-15%. The bottomline of Power Grid is expected to show a surge of around 5-6% once these tariffs get implemented.
And what about the likes of Tata Power and Reliance Power? They will have to depend on the state govt regulator, the State Electricity Board to implement these changes.
Source: sptulsian.com (By Ruma Dubey)
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