Dampener to new power sector investments or a bold step to provide benefits to consumer: Evaluating CERC draft regulations

With Central Regulator proposing the draft regulations for the period 2014-19, a wave of negative sentiments took ripples in already plagued power sector of India. The significance of these regulations are such that they would govern the fate of sector and economic mileage of the country at large till 2020.  Though, with general elections slated to be organised by the time these new regulations will find implementation (if implemented) shall witness a further lull in terms of attracting investments in the grappling power sector.  With India bracing for change in guard at the Government, it is quintessential that backbone of the infrastructure segment i.e. electricity sector hold its ground.

The draft regulations, if implemented would arguably indeed benefit the end consumers but will it be good in terms of bringing more investment corridors in the segment. The worst hit would be the CPSU’s and SEB’s power generation units for whom the “Return on Equity” (RoE) will get squeezed by at least 5% thereby plummeting their net earnings by 8-10%.  ENINCON team has evaluated these regulations and their possible impacts on the two major pivots i.e. the consumers and the generation companies of the electricity sector in India. Exhibit 1 depicts our evaluation and perspective upon the major highlights focused in particular for the coal based power generation plant. The highlights of the draft regulations are listed in the following sections.

Parametric Evalution of Cerc 2014-19 Draft Regulations & Impact Assestments

 

CEERC Draft Regulation and ENINCON Perspective

Key Highlights of CERC 2014-19 Draft Regulations :-

  • The arbitrage benefit on gross tax would be wished away as tax will now be paid at actual out go.
    Enincon Perspective: This benefit if withdrawn shall have a direct impact on RoE of power plants which are based on Minimum Alternate Tax (MAT). Likely to be retained in final regulations
  • The incentive structure will now be linked to PLF, instead of PAF
    Enincon Perspective: This will impact the power plants whose tariff are not decided through competitive bidding and hence NTPC would stand as worst hit by this. Likely to rolled back in final regulations
  • The incentive structure will now be linked to PLF, instead of PAF
    Enincon Perspective: The operating norms mainly SHR and Specific Oil consumptions are tightened
  • Gains based on any controllable factor like SHR , FOC and Aux. consumption shall be shared between gencos and beneficiaries in the ratio of 3:1
    Enincon Perspective:This will further impact adversely those power generating stations which are facing fuel deficit. Gas power plants will be worst hit as their PLF is in the range of 40% across the country.
  • This norms if found implemented would hit the efficiency led gains and worst hit would again be on NTPC. It is likely to be retained but O&M norms for FY15 may be kept at FY 14 levels
    Enincon Perspective: This norms if found implemented would hit the efficiency led gains. Likely to be retained

Future of Draft Regulations:-

The CERC’S draft regulations is most likely to witness a roll back on the PLF based incentive scheme and is expected to retain its old parameter of PAF. The O& M norms would also see more escalations in the continuously increasing inflationary environment and would vary on yoy basis for thermal power generation.

*The views expressed in this article are solely those of enincon perspectives and do not necessarily represent those of Enincon LLP.

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