Gas-based power units, especially in Andhra Pradesh (AP), have been crying hoarse over the lack of fuel availability. To remedy matters, last week, the AP government allowed such units in the state to use re-gasified liquefied natural gas (RLNG), which is imported.
The move was triggered by the shortfall in natural gas supplies from Reliance Industries Ltd’s (RIL) KG D6 field, which had hit major independent power producers (IPPs) in the state such as GVKPower and Infrastructure Ltd (GVKPIL), GMR Infrastructure Ltd and Lanco Infratech Ltd.
The government’s decision should resolve the power deficit in the state, which is expected to soar like in most other parts of the country during summer. Spot power prices have reportedly ranged from Rs 7-10 per unit in the last fortnight, which is good till it lasts for IPPs.
The government approval now allows units to use RLNG, imported by GAIL (India) Ltd. RLNG will be supplied to industrial users on the west coast in lieu of natural gas from RIL, which will be diverted to the power units in AP. However, IPPs will bear the cost of the more expensive RLNG—$10 (Rs450) per million British thermal unit (mmBtu) as opposed to $4.2 per mmBtu from RIL.
This would increase the variable costs of IPPs, which have tied in sale of power to the state distribution firms. But the agreements allow for these costs to be passed on to the consumer. In fact, it is a shot in the arm for the fuel-starved power units.
Plant load factor (PLF) at most units, which fell below 70% in the last couple of weeks, from about 85-90% in the first two quarters of fiscal 2011, will improve. Said Isaac George, chief financial officer of GVKPIL, “We should be able to operate at above 80% for 2011.” This is good news as operating at higher PLFs improves fixed cost leverage and, therefore, cash flows. Further, IPPs would reap the benefits of incentives for meeting higher PLFs—a clause built into the agreement.
But those units under merchant tariffs would certainly see the impact of higher variable costs as fuel becomes more expensive. Of course, if demand is robust, as is the case in summer months, and power tariffs continue to rise, IPPs may find use of RLNG viable. For example, some IPPs such as Lanco may use RLNG in its unit, which allows for “pass-through” of costs.
However, the point for investors to look at is long-term sustainability of power tariffs, and more importantly, fuel availability. Power stocks have since long underperformed the broader markets on concerns of fuel. For now, GAIL has reportedly arranged for imports until May.
Analysts’ consensus is that power units should operate at a minimum PLF of about 70% to be able to deliver reasonable (16%) return on equity invested into the project. Unless this sustainability is visible over a longer term, investors may not see upsides in power stocks.
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