Published on 24/06/2019 9:12:37 AM | Source: HT Media

NTPC: demand new challenge for India`s top power producer

Posted in Stock Market| #NTPC Ltd #India #Stock Market #Power Sector

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While fuel availability is normalizing for NTPC Ltd, a new challenge is emerging: demand.

Generation at thermal power plants tracked by the Central Electricity Authority dropped for the second consecutive month in May. Average utilization for April-May, as represented by the plant load factor (PLF), dropped from 78.7% a year ago to 73%. In May, it was even lower at 71.4%.

As the chart alongside shows, utilization has been steadily trending lower in recent years due to subdued demand. But the drop seems to have accelerated recently. “The 720-basis-point drop in NTPC’s coal PLF to 71% at the peak summer in May, which recorded the highest energy/peak demand, is quite surprising. The difference between the all India thermal PLF and NTPC’s coal PLF was at a record low of 8% (it averaged 15-18% in the past)" analysts at SBICAP Securities Ltd said in a note.

The fall in utilization coincides with a pickup in hydropower generation and in renewable energy. Given renewable energy’s must-run status, power distribution companies (discoms) would have reduced thermal power purchases. Other factors are at work as well, primarily on the cost front.

While tariffs in renewable energy have steadily fallen to ₹2.50 per unit, the average tariff at NTPC has risen from ₹3.18 in FY16 to ₹3.38 in FY19. The tariff rise at the company may not be huge and the gap with renewable tariffs may not appear large, but for cash-strapped bulk buyers, such as state power discoms, the savings are considerable.

The fall in utilization, despite greater fuel availability, indicates the discretion in electricity purchases by state utilities.

According to an analyst, some of NTPC’s newly-built plants have significantly higher variable costs, resulting in tariffs of more than ₹4 a unit. As states come across less-expensive alternatives in the form of hydropower, renewable or even spot thermal power, they generally back away from costly power-purchase agreements.

Of course, with a regulated business model, wherein minimum returns are assured, NTPC is insulated from changes in power offtake. Further, improved fuel availability and supplies help the company in recovering fixed costs. Also, the slow scale-up in the recently commissioned power plants may be weighing on overall utilization levels.

Even then, a sustained fall in utilization levels can be a major earnings risk, and running power plants at sub-optimal levels would hamper returns. “The sustained pressure on coal plant load factors is an area of concern as it affects efficiency parameters, among others," added the analysts at SBICAP Securities.