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Spark Capital: No free lunch anymore - Analysis of Draft CERC guidelines for MYT period FY15-FY19




Spark Capital Advisors(India) Private Limited


12 Dec 2013





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CERC tightens the noose for all; uncontrollable costs will be a pass-through We analyzed the much scrutinized draft terms and conditions of tariff for the next MYT period by CERC. Apart from addressing and fixing the issues that have troubled the sector in the recent years (change in law in foreign countries) the Commission has clearly not hesitated to step on the toes of many in-order to lower power tariff for consumers; this theme sweeps across all the changes and additions in the draft (which we highlight in the following and which we have analyzed in detail in this report along with the likely effect on the sector/ stocks under our coverage). It is noteworthy though that the final terms and conditions expected to be released in 4QFY14 after consultations with the stakeholders may be different/ watered-down. In summary the draft: Proposes to control the variation between estimated project cost and final CAPEX; cost escalations due to uncontrollable factors only will be allowed Proposes to increase ceiling for cost of “Initial Spares” as a percent of original project cost Proposes to increase the cost allowed for “Renovation & Modernization” for the purpose of extension of useful life for coal/ lignite based generating stations Proposes to reduce the time between initial tariff approval and scheduled COD for generation companies Proposes to penalize non-commissioning of project after issuing the initial tariff order Proposes to tighten norms on recovering shortfall in tariff after true-up Envisages generation companies to stomach losses in-case of cost escalations due to “controllable” factors; while cost escalations due to uncontrollable factors will be passed-through Proposes to increase the useful life of AC Substations and transmission lines to 35 years for depreciation Proposes to modify existing provision of pre-tax RoE being grossed-up with tax rates to post tax RoE with income tax to be recovered on actual basis to the extent of RoE only Proposes to tighten norms for calculating working capital and interest on working capital Proposes to tighten norms for recovering operations & maintenance expenses for transmission assets; while the benchmark o&m charges for power generation have been increased Proposes to adopt target PLF (instead of PAF) to qualify for incentives for generation companies and increases the target availability factor to qualify for incentives for transmission assets Proposes to lower the benchmark gross SHR (i.e. increasing the expected efficiency of thermal plants) Proposes to adopt stringent auxiliary energy consumption norms for combined cycle gas plants Proposes to lower the benchmark secondary fuel oil consumption for pit-head coal plants Tightening of norms applicable to qualify for incentives and lower benchmark o&m charges will affect PGCIL adversely. Sharing of gains with the beneficiary states in case of over-recovery and efficient operations, adoption of PLF based incentives and stricter efficiency parameters will be negative for thermal power generators – specifically for Lanco Infratech and Torrent Power. The draft is negative for NHPC as well as the delays in project execution will not be looked upon favorably anymore while income from incentives will be lower.

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