Post CERC Order NTPC Stock Plunges 13.64%

NTPC, India's largest power producer has challenged the Central Electricity Regulatory Commission (CERC) on tariff norms in the Delhi High Court. Recently the regulator came up with new norms for FY14-FY19, which will come into effect from April 1, 2014 and remain till March 31, 2019.

The regulator has made some changes in the incentive structure according to which the incentives will be allowed on the basis of plant load factor (PLF) rather than plant availability factor (PAF). PLF is based on the actual power that is generated at the plant and PAF measures the generation capacity that is available. The generation companies were getting an attractive incentive of 50 paise/kwh if PAF exceeded 85%. 

But now the generation based incentives will impact the generation companies as their PLF is lower than PAF. Companies like NTPC whose core business is generation and sale of electricity to state electricity boards will be affected. Earlier it used to earn incentives on PAF, but now the earnings are going to be influenced as it will be based on PLF. The current PLF of NTPC is around 80-83% whereas PAF is around 90%. 

CERC has also offered a minimum return of 15.5% return on equity (RoE) for the period 2015-2019. It has cut station heat rate from the current 2500 kilocalories a unit to 2450 kilocalories for the 250 MW sets and the secondary fuel consumption has been reduced by 50% to 0.5 ml a unit. The generation companies will have to share 40% of the incentives earned from the heat rate/auxiliary consumption efficiency with state electricity boards.

Under the new regulations, the distribution companies will reimburse whatever tax may be paid by them instead of normative corporation tax. With the power sector not performing well, they were paying minimum alternate tax of around 23% instead of the corporate tax of 33%. However, the generating companies get reimbursed from the distribution companies at a rate of 33%. As per new rules, generator companies like NTPC will be deprived of this tax arbitrage.

As mentioned earlier, CERC has reduced the heat rate which is required to produce one unit of power. The coal consumption to produce one unit of power is reduced by 2%. Earlier the power generating companies were allowed to burn coal and generate power and this could be collected from the procurer. But this change will help to reduce coal consumption and it will also be less harmful for the environment.

The new policies are aimed at increasing the operational activities of the power plants, but it will hit profitability of companies like NTPC. The new norms will be harsh for the power generating companies as their incentives are going to be reduced.  

As per the current norms issued by CERC, the rate of incentives will be paid if PLF is above 85%. If NTPC manages PLF to exceed 85% then also it will not be eligible to earn any incentive. The company's PAF is 90% and if the company would have been allowed to earn incentives as per this, then it would have earned around Rs 150 crore on yearly basis. Due to change from PAF to PLF, the company will lose the opportunity to earn this profit.

This is seen in the movement of the stock price. The stock price, which was trading on BSE at Rs 132.90 on February 20, 2014 and on March 10, 2014 it closed at Rs 116.95, losing around 13.64%.