New CERC tariff order a shocker for NTPC, says Fitch

The central power regulator's new tariff order for FY15-FY19 will severely hurt state-run power generator NTPC, which is likely to take a hit of 350 basis points on its pre-tax return on equity, Fitch Ratings said.

As per the Central Electricity Regulatory Commission (CERC)'s new norms, to be in force for five years (April 2014 to March 2019), there will be key changes with regard to tax and calculation of incentives for thermal power plants. The rules were notified on February 21.

"NTPC would be the most hurt among the country's rated state-linked electricity utilities by the regulator's final tariff order for the upcoming five-year regulatory period. It will bring down NTPC's pre-tax return on equity (RoE) by around 350 basis points," Fitch said in a statement.

The key changes made by the CERC include shift in the incentive regime from the plant availability factor (PAF) to plant load factor (PLF). Incentives based on PLF would depend on actual power generation which may result in lower incomes.

PLF is a measure of average capacity utilisation while PAF refers to average of daily declared capacities. The incentive for every unit of electricity generated has been kept flat at 50 paise/kWh.

Based on new norms, the rating agency estimated that the new tariff order would bring down NTPC's pre-tax RoE by around 350 basis points.

"NTPC's profitability will be further hit because the incentives for thermal generators in the next regulatory period will be based on companies reaching a PLF of at least 85 per cent, rather than the PAF."

However, the new incentive regime will have a limited impact on National Hydroelectric Power Corp and PowerGrid, the rating outfit noted.

PLF is dependent on the ability of the state discoms' ability to off-take power from plants, the agency said.

"NTPC's coal-based power plants had an average PLF of 83 per cent in FY13, with 10 of its 15 coal-based plants having PLFs of less than 85 per cent. The coal-based plants PLF further fell to 79 per cent as of December 2013, implying that even fewer of NTPC's plants would qualify for the incentives," it said.

Fitch observed that none of NTPC's seven gas-based plants had PLFs over 85 per cent. "Furthermore, the CERC has tightened certain operational standards and required sharing of cost benefits with power distributors."