This could be another difficult year for power companies
Munira Dongre 09 February 2011

Missing power targets could be the least of power generation companies’ worries—managing to sell power and securing coal could be bigger issues

It is not new for India to miss its power capacity addition targets. Nor is it new for it to miss even targets that have been revised downwards. We began the current Five-Year Plan (2007-12) with an ambitious target of 78,577 megawatts (MW) which was scaled down to 62,374MW in the mid-term review.

The current consensus view is even dimmer-that India will end the five-year period with an actual generation of only about 50,000MW. Most of the shortfall is being blamed on the delay in commissioning of hydropower projects.

However, this year, not meeting targets may be the least of the power generation companies' worries. Bigger issues are likely to be securing fuel at reasonable prices and getting buyers for it at profitable prices.

In a report to its clients today, CLSA says that India has seen a generation growth of only 4.3% for the period from April-December 2010, despite good capacity addition (relatively) in this period.

It believes that while lower coal production had some impact, the major reason for cutting back production was that state utilities are simply not picking up enough power.

For example, between October and December 2010, availability levels at NTPC's coal plants were 93%, but actual generation was down 3.3 percentage points at 87.2% plant load factor (PLF).

The best illustration of how state utilities are not buying expensive power is the sharp fall in merchant tariffs. Even though they have bounced back in December and January, the fact is that merchant tariffs hit rock bottom before this-falling to just Rs3.40 per kWh (kilowatt-hour) in November 2011.

Recently, Coal India conveniently declared (after its initial public offering) that its production has been impacted by the environment ministry's stand on mining activities in critically-polluted areas, which would lead to a shortfall of around 16 million tonnes (MT).

Coal India has estimated that if there is no relaxation of norms on this front, production could fall short by as much as 39 million tonnes (MT). Most utility stocks have underperformed the market in the last six months and it is unlikely that this year is going to be an easy year for these companies.

Within the lot, utilities which have passed through charges (such as NTPC, even though pass-through does not insulate it from lower offtake) or those that have resources such as coal mines (such as Tata Power and JSPL), are better bets.

Power deficits in India also declined much faster than expected against prospects that due to the fast pace of development, requirements will always be a long way ahead of generation.

However, from a peak of 14% in April 2010, the deficit is now down to 6% and is expected to shrink rapidly.

The only explanation is that demand is not actually rising as rapidly as earlier anticipated. Some estimates say that India will meet all its power demand by 2012.

That is just one year away. Some believe that this is because of the way 'demand' is defined. Not every Indian will be able to afford power at going rates for quite some time. In metro cities, the average power bill ranges between Rs500 and Rs1,000-definitely in the expensive range. Even industries will not be able to afford expensive power and would prefer to generate captive power, whenever viable.

Almost half of the rural households do not have access to any kind of electricity even today and would not be able to afford it even if it were offered to them. Out of the people who can afford electricity, almost 40% are 'accustomed' to power cuts. Power theft and transmission & distribution losses still remain big issues in India and power distribution companies lose big money to these factors each year.

However, for now, power generation companies need to focus on securing their fuel supplies and ensuring that their PLFs don't dip below critical levels. NTPC's share price has gone virtually nowhere for the last two years. According to CLSA's calculations, NTPC trades at a price to book value (FY12) of 1.9 times. CESC is the cheapest utility with a ratio of 0.9 times and JSPL and Adani Power trade at a premium of 3.1 times and 3.4 times, respectively.

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