>POWER SECTOR (ICICI DIRECT)

Regulators move in the right direction…

The Central Electricity Regulatory Commission (CERC) came out with the draft “Tariff Norms for Renewable Energy Projects” in May 2009. The tariff policy will regulate renewable energy projects, which are central sector generating stations or generating stations with composite scheme for sale of electricity to more than one state. The different renewable energy projects for which tariff is determined in the manner suggested under these tariff norms includes wind, small hydropower plants, biomass, bagasse, solar PV and municipal solid waste. The steps taken by the regulator were pointing in the right direction with regard to being clear on the tariffs for renewable energy projects. Several parties to the policy will submit their comments and suggestion on the policy. Developers, to whom the tariff norms are applicable, will find comfort in the fact that the preferential tariff is to be determined for a period of 13 years. The tariff will be determined on a competitive basis after the debt service obligations are covered.

Suzlon Energy, PTC India and Tata Power would be the immediate beneficiaries of the tariff norms. We believe the move is in the right direction. This will lead to increased investment in the renewable energy space.

Policy norms proposed under the New Tariff Norms
We have tried to focus on the impact of the norms on the wind energy sector in the event update.

■ Tariff design
Under the earlier norms, SERCs were prescribing a varying approach for tariff design. In the recommendation given by the CERC, under the new tariff norms, they have suggested a levelised tariff mechanism. Such a tariff mechanism will be applicable over the preferential tariff period of 13 years. Since the levellised tariff takes into account the extra cash flow requirement by the project for servicing the debt in the initial phases of the project it will help the developers to manage cash flows properly. At the same time it will not lead to a significant burden on utility.

■ Debt equity ratio
The debt equity ratio has to be considered as 70:30. If the equity actually deployed is more than 30% of the capital cost, equity in excess of 30% shall be considered as normative loan. If the deployed equity is less than 30% then actual equity will be considered for determination of tariff.

■ Capital cost
The capital cost for wind energy projects shall be Rs 5.15 crores per MW for FY09-10. It will be linked to an indexation formula for computing the capital cost for projects coming after FY10.

■ Tariff structure
The tariff on renewable energy consists of the following fixed components. It includes
1. Return on equity
2. Interest on loan capital
3. Depreciation
4. Interest on working capital
5. Operation and maintenance expense

• Return on equity: It is proposed that the preferential return at the rate of 16% will be allowed in case of renewable energy projects. The developer shall be entitled to avail the 80IA benefit under the Income Tax Act, which will result in the MAT rate being applicable for the initial 10 years. This will translate into a pretax return on equity of ~17% for the initial 10 years. Beyond 10 years, the normal corporate tax rate of 33.66%will be applicable. This will translate into a pre-tax rate of return on equity of ~23%.

• Interest on loan capital: A normative loan tenure of 12 years has been specified for claiming interest rate on a normative basis in tariff determination. The benchmark interest rate is prescribed as 100 basis points above the SBI PLR prevalent as on April 1 of the relevant period.

• Depreciation: After considering the normative repayment tenure of loan over the initial 12 years, the commission has prescribed the rate of depreciation. The estimated useful life of the asset is distributed into two parts. The first part will be 12 year over which the loan capital can be serviced by the developer by way of depreciation. Hence, it has been proposed as 6% for the initial 12 years.

• Interest on working capital: Interest on working capital will be calculated at the average SBI short-term PLR prevalent for the period (April 2008 – March 2009). For the calculation of working capital the commission has prescribed the following line items.

• Operation and maintenance expense of one month
• Receivable equivalent to 1.5 months of energy charges
• Maintenance spare @ 15% of operation and maintenance

• Operation and maintenance expense
The regulator has prescribed the operation and maintenance expense for FY2009-10 at Rs 6.5 lakh per MW for the first year. CERC has also prescribed an escalation factor of 5.72% per annum from FY11 onwards.


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