Power sector regulator Central Electricity Regulatory Commission (CERC) released the draft tariff norms for the period 2024-29 on January 4. Typically, every five years, CERC releases norms regarding the tariff determination of the power purchase agreements (PPAs) on regulated projects, which are generally carried out by the PSUs. These are the draft regulations while final regulations are expected to be announced by March 2024 and will come into effect from April 2024, till March 2029. Here, we take a look at the changes in regulations compared to previous five-year cycle and their impact on the utilities.

What has changed?

The tariffs on regulated projects in the thermal and hydro generation space and transmission are typically of cost-plus nature and enable companies to recover costs plus earn certain return on equity (ROE). Thereby the earnings for such assets are a function of base return on equity, incentive structure, benchmark for recovery of cost and benchmark for operations and maintenence (O&M) assets.

There is no change in the regulated ROE earned on the existing projects i.e. 15.5 per cent for thermal generation, hydro generation and transmission-based projects and 16.5 per cent for pumped hydro storage. However, if new projects are considered, ROE for thermal and hydro generation stations remains constant at 15.5 per cent while the same is reduced to 15 per cent for transmission projects and increased to 17 per cent for the storage type hydro generating stations, including pumped storage and run-of-river generating station with pondage.

Typically, full recovery of certain costs occurs, provided the assets show technical availability to perform at a certain minimum standard measured by normative annual plant availability factor (NAPAF). The NAPAF for all thermal generating stations has been maintained at 85 per cent except for those completing 30 years as on March 31, 2024, for which the same is 80 per cent.

Further, a thermal station operating beyond PAF and plant load factor (capacity utilisation) of more than 85 per cent is entitled to a certain incentive (threshold of 80 per cent for plant more than 30 years old) The incentive for the same during peak hours has been increased from ₹0.65 per kwh to ₹0.75 per kwh while the same has been maintained at ₹0.5 per kwh for off-peak hours.  For thermal plants older than 25 years, a special annual allowance of ₹10.75 lakh per MW has been proposed as against ₹9.5 lakh per MW earlier.

Also, there are certain changes in O&M cost annual escalation for thermal plants. The annual escalation has increased from 3.5 per cent earlier to 5.86 per cent.

Impact on utilities

As the status quo has been maintained on the ROE of existing projects, there may not be a major impact on earnings of the PSU power companies while the other changes might have minimal effect.

NTPC stands to benefit with certain regulatory changes made for thermal generating stations. Of a total 73.8 GW of installed capacity, 8-10 GW (11-14 per cent) of thermal capacity has completed 25-30 years of operations, thereby eligible to gain from higher special allowance, and will enjoy lower PAF and PLF cutoff. Taking this, along with increase in PLF incentives and considering the incentive income of ₹515 crore in FY23 (3 per cent of PAT), there might be a low single-digit upside in its earnings in the near term.

While there has been a 0.5 per cent reduction in ROE of RTM (regulatory tariff mechanism) based power transmission projects, it applies only to the new projects. Power Grid Corp (PGCIL) derives majority of its revenue from such projects. Currently, PGCIL has an existing regulatory asset base of around ₹2.4-lakh crore as against under-construction capacity of ₹30,000 crore of RTM projects. Also, most of the incremental capacity addition shall be based on tariff based competitive bidding (TBCB) rather than RTM. Hence, there shall be minimal negative impact on the earnings of PGCIL owing to changes in tariff regulations.

Further, hydro generation-based PSUs, NHPC and SJVN, might marginally benefit from the 0.5 per cent increase in ROE for certain new projects. Currently, NHPC’s under-construction projects Subansiri and Parbati II (2.8 GW in total) shall be eligible for the increased ROE of 17 per cent. Further, SJVN’s 2.3 GW of upcoming projects shall benefit from the same.

On the whole, the draft regulations might have a slight positive impact on the PSU generation-based utilities. The final regulations shall be placed by March 2024 upon hearing from the stakeholders.

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