Power generation firms face challenges

Power generation firms face challenges

Undoubtedly India’s energy story is intact, given the long-term demand-supply scenario. But power generation utilities in the near term could see a threat to profitability, given the volatile merchant power tariffs, evacuation and fuel availability challenges that pose a threat to profitability.

On the one hand, state electricity boards, which are not financially healthy, resort to power cuts and low evacuation of power. On the other, merchant power tariffs (where utilities sell directly to consumers) have been volatile in the past 12-18 months.

Hence, most firms in the private sector such as JSW Energy Ltd, Lanco Infratech Ltd and Tata Power Co. Ltd have had to deal with falling tariffs- around Rs4 a unit compared with about Rs5.2 a unit a year ago.

But, the situation has reversed. Power tariffs have dropped in the last three months due to lower demand (only 80% of peak season) during winter and higher generation of hydropower due to good monsoons.

Also, stiffer competition with more firms led to softer power rates. An Antique Stock Broking report says, “We believe this (volatile tariffs) has been mainly on account of increase in the number of sellers in the market along with the fact that utilities want power at a reasonable price."

The power trading exchange has led to the development of a spot market in power, which has increased tariff volatility.

A bigger challenge is the fuel constraints and rising cost of coal and gas, which are adversely affecting power projects.

While imported fuel is more expensive, gas production at the Krishna-Godavari basin is insufficient to meet needs of power utilities. Domestic coal production will take another five-seven years to ramp up to industry needs.

The world deficit in coal has seen prices shooting up. The consequent higher cost of generation has made them back down production. April till November, coal and lignite-based power utilities operated at a plant load factor (PLF) of 73% compared with 76% during the year-ago period.

For instance, NTPC Ltd registered a year-on-year (y-o-y) dip of 415 basis points in PLF to 85% in November, mainly on account of lower generation from gas-based plants. One basis point is one-hundredth of a percentage point.

The catch for utility generators is to ensure a balance between power sold through a fixed power purchase agreement (PPA) and merchant power sold in open markets.

“We try to sell about 65% of power generated through a fixed PPA and rest through merchant route," says Raaj Kumar, CEO, energy, GMR Infrastructure Ltd, which has also bought coal mines overseas to ensure supply of coal for power projects.

Given the energy deficit in the horizon, capacity additions continue. In fiscal 2010, 9.6 gigawatt (GW) of capacity was added and another 7GW has been added till date this fiscal. Analysts also expect capacity additions of 20-30GW in the next 15-18 months.

This means that merchant tariffs could be subdued in the near to medium term. Coal and gas-based generating utilities may be faced with higher fuel costs and lower PLF.

A September quarter results analysis report by Edelweiss Securities Ltd states that fuel linkages remain key concerns even as merchant tariffs could remain depressed till third quarter of FY11.

Shares of generation utilities such as Adani Enterprises Ltd, GMR, NTPC, GVK Power and Infrastructure Ltd have fallen since October by 15-20%. Given these challenges, investor prospects seem dim for most firms in the space in the near term.

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