India: Make A Complete And Total Exit From India Dedicated Portfolios
PFC, REC And Merchant Power Producers Will See Earnings Downgrade As PSEBs Go Bankrupt Again, this will pull down equipment suppliers and banks and ultimately the markets at large.
Independent Power Producers set up under the part Merchant Power, Part Fixed Return Basis Are Likely To See Substantial Earnings Downgrades: The project earnings are impacted on account of three key factors: (1) fall in merchant tariffs; (2) fall in PLFs; and (3) rising cost of generation led by increased blending of high cost coal from imports / e-auction (spot).
Given the high sensitivity of a project's earnings to each of these factors, we believe the sector will likely witness substantial earnings downgrades across the street. We have cut our merchant tariff and PLF assumptions across companies and continue to factor in higher cost of fuel for thermal projects in order to incorporate this impact.
SEBs Go Bankrupt, And Likely To Remain So
State Electricity Board (SEB) financials continue to deteriorate. As per the Power Finance Corporation's (PFC) report, during FY09 (latest data available), annual SEB losses reached about US$11 bn. On the other hand, merchant volumes are rising on account of the commissioning of new merchant capacities. With already-weak financials, rising merchant volumes have impacted the SEBs' ability to maintain higher merchant tariffs. Except under exceptional situations such as elections, we expect merchant power prices to remain under pressure going forward due to the following reasons:
Increase in merchant capacities. Currently merchant sales constitute about 9% of the overall power sold in India. Given the lucrative merchant opportunity so far, most private sector developers are implementing merchant capacities. Even assuming project execution delays, we believe merchant sale volumes will double by FY14E on commissioning of merchant capacities. Given the limited ability of SEBs to absorb these volumes at higher prices, we expect increased competition to keep merchant prices under check.
Augmentation of national transmission grid capacity.
One of the reasons for high merchant tariffs currently is the limited capacity of the national transmission grid, leading to grid congestion. Currently, about 5-15% of the power exchange volumes fail to get transacted on account of grid congestion. However, we believe that the recently introduced transmission pricing and losses regulations should increase investments in the transmission sector (as underscored by Powergrid's capex), easing congestion.Regulations.
The regulator has already implemented a short-term price cap once in Sept/Oct 2009 and had contemplated for its re-introduction. The regulator is keen to keep a check on excessive profits being earned by 'utilities' while performing its role to protect the interests of the end-users. In our view, direct intervention through price caps or indirect regulations such as unscheduled interchange (UI), additional UI rates, transmission pricing, among others, to check high merchant prices cannot be ruled out.Introduction of new products on power exchanges.
Merchant tariffs on the power exchanges are lower compared to the OTC market mainly as the exchange protects from counterparty risk. However, currently a majority of the short-term power volumes are transacted through the OTC market (bilateral trades). One of the reasons for this is the availability of just 'day-ahead/ week-ahead' products on the exchanges currently.The expected introduction of longer dated products such as 'month-ahead' contracts should lead to an increase in volumes on the exchanges, amongst other factors. This should result in lower merchant tariffs.Besides, we believe that with share of merchant sales increasing as a proportion of overall power sales, its likely impact on inflation and the already-stretched financials of SEBs could lead to political involvement to rationalise the profit spread of merchant developers.
No Coal, The Lights Go Out
Coal India is currently providing only 60-70% of the fuel requirements for projects based on domestic linkage coal. Most of these projects are either attempting to meet their balance requirements through expensive e-auctions / imported coal or are operating at lower utilisations/ PLFs. While we were factoring in higher fuel costs so far, we note that the earnings of companies will be impacted by the lower PLFs (earnings most sensitive to PLF).
Examples of projects impacted on account of lower fuel supplies from Coal India (amongst the companies under our coverage) include:
KSK's Wardha Warora project in Maharashtra that was supposed to receive linkage coal from the cost-plus mines of Coal India from April 2010. Coal supplies to this project have not started so far.Lanco's Amarkantak I & II project is receiving only 60-65% of its coal requirement from Coal India under its linkage. The signing of the fuel supply agreement by Coal India has been delayed.
NTPC's Farakka and Kahalgaon projects are receiving only 65-70% of their coal requirements from Coal India on account of railway bottlenecks and delayed production at Coal India.Reliance Power's Rosa
power project has been receiving only 50-60% of its coal requirements from Coal India impacting the project's PLF.Adani Power's Mundra I & II projects were supposed to receive 30% of their coal requirements through coal linkage. The supplies for these have not yet commenced.
A sharp fall in merchant tariff rates along with rising fuel costs and fuel unavailability has led to some merchant projects operating at lower PLFs. Lanco's 300MW Amarkantak-I project has been primarily impacted.
Fall in UI charges
A project receives Unscheduled Interchange (UI) charges during the synchronisation phase (before it achieves commercial production). A sharp fall in UI charges along with rising fuel costs has led to projects operating at lower PLFs. Lanco's 300MW Amarkantak-II and 600MW Udupi project, Adani Power's 330MW Mundra-II project, KSK's 135MW Wardha Warora project and Reliance Power's 300MW Rosa project are some of the key projects impacted on this account.
Post a Comment