NTPC push ensures assured return on equity stays course

NTPC push ensures assured return on equity stays course
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First Published: Wed, Mar 26 2008. 01 00 AM IST
Updated: Wed, Mar 26 2008. 08 43 AM IST
New Delhi: India’s government has stayed a plan to reduce the assured return on equity or RoE on negotiated power projects from 14% to 12% in the face of opposition from state-owned power generation firm NTPC Ltd.
Negotiated projects are those cleared after discussions between the power generation firm and the relevant government. Unlike the ultra mega power projects, they do not involve competitive bidding.
“There is too much opposition and very few takers for the proposal (to reduce the assured return),” said Kirit Parikh, member, energy, Planning Commission, India’s apex planning body.
The proposal put up by the Planning Commission had asked for reducing RoE (the after-tax profit of a company as a proportion of its equity, expressed in percentage) on negotiated projects as reported by Mint on 26 November.
“The proposal has now been put on hold,” admitted a senior government official who did not want to be identified.
The Planning Commission’s argument was that an assured return didn’t really fit with the governments efforts to deregulate the power sector. It was also against providing such an incentive to firms such as NTPC which are profitable and have substantial equity. NTPC has argued that reducing the guaranteed return could crimp investments in India’s power sector and hurt its ability to fund expansion.
All of NTPC’s power generation projects work on an assured-return system. State Electricity Boards, or SEBs, which buy power from generation firms and supply them to end users, bear the burden of assured return on negotiated projects.
With returns assured, firms pass on any increase in either the cost of funding or raw material costs, such as price of coal and gas, to customers.
Senior NTPC executives declined to comment on theissue. The power ministry too had opposed the proposal because it feared that this would reduce investments in the power sector at a time when these are most needed to meet the demands of a growing economy.
India plans to add power generation capacity of 78,577MW by the end of the 11th Plan in 2012 at an investment of Rs10.31 trillion.
According to the power ministry, the government faces a Rs4.51 trillion funding shortage in this effort, which it hopes to make up by attracting investors. The decision not to reduce the assured return would work in NTPC’s favour, said Amar Ambani, vice-president, research, India Infoline. “It is a positive thing for NTPC as any reduction in RoE would have impacted the NTPC’s expansion plans.”
NTPC has a power generation capacity of 27,404MW and plans to increase this to 50,000MW by 2012.
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First Published: Wed, Mar 26 2008. 01 00 AM IST
More Topics: NTPC | Equity | RoE | Economy and Politics | Indicators |