On the face of it, state-run power major NTPC continues to outperform most of its private peers which have entered the fray in less than a decade, by raking in higher profits in relation to revenue. However, this has mostly to do with relative regulatory flexibility and policy support enjoyed by the PSU’s plants, with little contribution from the company’s operational efficiency.
During the July-September quarter, NTPC posted a net profit of R2,490 crore on a revenue of R16,415 crore, a margin of 15%. In comparison, private players Adani Power and Lanco Power posted heavy losses during the quarter while Tata Power and JSW Energy made modest profits. Only Reliance Power has posted margins slightly higher than NTPC during Q2 at 19%, thanks to efficient capacity utilisation at its Rosa and Sasan plants.
All NTPC thermal power stations operate under the protective cost-plus regime, while private firms which have bagged projects through tariff-based competitive bidding face commercial risks at every stage. Power projects are financed in a 7:3 debt-equity ratio. While NTPC is entitled to 15.5-16% return on equity (minimum 15.5% RoE and additional 0.5% as incentive when projects are completed on time) from its cost-plus projects, there is no assured return on projects awarded through the bidding route. Non-automatic pass-through of fuel costs (which have risen in the case of most plants) and a weak payment security mechanism are other irritants faced by the private players.
Pertinently, NTPC had lined up massive capacities of over 40,000 MW for implementation under the now-discontinued cost-plus (MoU) regime before the tariff-based bidding regime was made mandatory in January 2011.This means the PSU would continue to be insulated from the risks posed by the tariff-based bidding regime for some more years. Including its existing capacity of 42,500 MW, 20,000 MW under construction and another 40,000 MW for which the company has entered into MoUs with distribution companies, a massive 1 lakh MW capacity of the PSU would be out of the tariff-based bidding mechanism.
A recent study by the Central Electricity Regulatory Commission (CERC) has found that in 12 out of 14 cases, levelised cost-plus tariffs were higher than those discovered through bidding within a range of 4-20%. This, despite the report excluding subsequent capital expenditure allowed under the cost-plus dispensation for the purpose of comparison.
While Adani Power is losing Rs 1,400 crore a year or thereabouts on account of additional fuel costs on power supplied to discoms of Gujarat and Haryana from its Mundra power plant, Lanco must run its plants at less than contract capacities due to domestic fuel shortage. The average plant load factor (PLF) of Lanco's generating stations worked out to be 47% against the operational threshold of 85% during Q2 this fiscal. Profits reported by Tata Power and JSW Energy were just nominal (less than 1% of total revenue).
While private developers bear all risks of the bidding regime – those relating to project execution, fuel price, demand and payment – NTPC remains insulated from such vagaries. For the PSU, if project cost escalates due to delays in competition, the extra expenditure can be capitalised and the burden passed on to the distribution companies as fixed charges. Similarly, the developer can recover additional fuel costs from discoms if it has to import coal owing to domestic fuel shortage. Even if discoms fail to lift (costly) power generated from imported coal, they will have to pay fixed charges to the PSU. That means there is little financial impact on a company like NTPC if discoms do not buy power from its plants.\
“There is no level playing field between NTPC and private players as they are operating on different footings,” said former Union power secretary RV Shahi, referring to competitive bidding and cost-plus regimes. The cost-plus system ended on January 5, 2011, giving way to mandatory bidding regime.
Private developers which bagged power purchase contracts by participating in bidding have to bear fuel price risks for 25 years. If a discom refuses to take allocated power, the developer can sell electricity in the open market. However, that is easier said than done, since finding an alternate buyer could prove tricky.
The unanticipated rise in fuel costs have proved to be a problem for private power companies. Tata Power and Adani Power are struggling to get the discoms agree to tariff hikes of 59 paise/unit and 80 paise respectively for their Mundra projects, even though the Central Electricity Regulatory Commission has recommended compensatory tariffs.
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