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UI Regulations bring negative catalysts
The new CERC UI regulations – 1) are likely to negatively impact earnings of utilities such as NTPC and 2) bring negative catalysts for merchant power plants. The reduction in the peak UI rate from Rs10/unit to Rs7.35/unit (Rs4.08/unit for plants using fuel supplied under APM) is likely to reduce the average UI realizations of utilities thereby lowering the supernormal profitability in such transactions. Our back-of-envelope calculations suggest that FY10E earnings of NTPC are likely to be negatively impacted by 2.5-3%. Secondly, the reduction in peak rates is likely to reduce the peak short term tariffs to Rs6-8 /unit from Rs8-10 / unit at present. This in turn is likely to have huge negative impact (~ 20%) on the expected profitability and risk-reward perception of merchant power plants in the country.
New UI regulations bring negative catalysts to utilities* as well as merchant power plants
The new UI regulations brought by CERC bring negative catalysts to utilities* as well as merchant power plants. The reduction in peak UI rate is likely to reduce the average UI realizations of utilities which in turn will reduce the profitability in such transactions. The cap of Rs4.08/unit on plants using APM fuel is likely to further negatively impact earnings of utilities like NTPC which predominantly use fuel supplied under APM. The new UI regulations are also likely to reduce the peak short term tariffs which are directly linked with UI peak rates.
We expect negative impact on NTPC’s FY10E earnings
We manifested our analysis of new UI regulations on NTPC FY10E earnings estimates. We believe NTPC, which is predominantly using fuel supplied under APM, is likely to record lower average realizations per unit under UI transactions now - negatively impacting the supernormal profitability of such transactions. Though it is very difficult to ascertain the exact quantum of impact but our back-of-envelope calculations suggest that FY10E earnings of NTPC could be negatively impacted by 2.5-3%.
Likely to change risk-reward perception of merchant power plants
Our analysis, of different time periods with different peak UI rates, indicates that the peak short term trading tariffs are directly linked with peak UI rate. During January 2006 to April 25, 2007 when the peak UI rate was Rs5.70 / unit, 60% of the short term power was traded in the tariff range of Rs4-6/unit. Further, there were no short term trades at rates higher than Rs6/unit. Similarly during the period Jan 7, 2008 to December 31, 2008 when the peak UI rate was Rs10/unit, 36% of the short term power was traded at tariffs > Rs8/unit and 83% of the short term power was traded at tariffs > Rs6/unit. Thus, with reduction in peak UI rate by more than 26%, we expect peak short term trading tariffs to come down in the range of new peak UI rates. Further, the fact that during last one year, 36% of the short term volumes were transacted in the tariff range of >Rs8/unit, the reduction in peak UI rate is likely to have a major impact on profitability of merchant power plants. This in turn is likely to trigger negative perception towards the risk-reward of the merchant power plants.
The new CERC UI regulations – 1) are likely to negatively impact earnings of utilities such as NTPC and 2) bring negative catalysts for merchant power plants. The reduction in the peak UI rate from Rs10/unit to Rs7.35/unit (Rs4.08/unit for plants using fuel supplied under APM) is likely to reduce the average UI realizations of utilities thereby lowering the supernormal profitability in such transactions. Our back-of-envelope calculations suggest that FY10E earnings of NTPC are likely to be negatively impacted by 2.5-3%. Secondly, the reduction in peak rates is likely to reduce the peak short term tariffs to Rs6-8 /unit from Rs8-10 / unit at present. This in turn is likely to have huge negative impact (~ 20%) on the expected profitability and risk-reward perception of merchant power plants in the country.
New UI regulations bring negative catalysts to utilities* as well as merchant power plants
The new UI regulations brought by CERC bring negative catalysts to utilities* as well as merchant power plants. The reduction in peak UI rate is likely to reduce the average UI realizations of utilities which in turn will reduce the profitability in such transactions. The cap of Rs4.08/unit on plants using APM fuel is likely to further negatively impact earnings of utilities like NTPC which predominantly use fuel supplied under APM. The new UI regulations are also likely to reduce the peak short term tariffs which are directly linked with UI peak rates.
We expect negative impact on NTPC’s FY10E earnings
We manifested our analysis of new UI regulations on NTPC FY10E earnings estimates. We believe NTPC, which is predominantly using fuel supplied under APM, is likely to record lower average realizations per unit under UI transactions now - negatively impacting the supernormal profitability of such transactions. Though it is very difficult to ascertain the exact quantum of impact but our back-of-envelope calculations suggest that FY10E earnings of NTPC could be negatively impacted by 2.5-3%.
Likely to change risk-reward perception of merchant power plants
Our analysis, of different time periods with different peak UI rates, indicates that the peak short term trading tariffs are directly linked with peak UI rate. During January 2006 to April 25, 2007 when the peak UI rate was Rs5.70 / unit, 60% of the short term power was traded in the tariff range of Rs4-6/unit. Further, there were no short term trades at rates higher than Rs6/unit. Similarly during the period Jan 7, 2008 to December 31, 2008 when the peak UI rate was Rs10/unit, 36% of the short term power was traded at tariffs > Rs8/unit and 83% of the short term power was traded at tariffs > Rs6/unit. Thus, with reduction in peak UI rate by more than 26%, we expect peak short term trading tariffs to come down in the range of new peak UI rates. Further, the fact that during last one year, 36% of the short term volumes were transacted in the tariff range of >Rs8/unit, the reduction in peak UI rate is likely to have a major impact on profitability of merchant power plants. This in turn is likely to trigger negative perception towards the risk-reward of the merchant power plants.
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