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Power

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Key conclusions

Key reforms introduced to address issues in fuel availability, improve health of discoms and tackle stressed PPAs, however, progress remains slow

Fuel constraints, weak discom financials, aggressive bidding have adversely impacted returns of many operational projects

Moreover demand is expected to slowdown to 5.3% CAGR over next 5 years due to weak economic growth

Slower demand, issues in clearances, and stretched financials of developers to moderate pace of capacity additions to 55 GW over 2013-18 vis--vis 64 GW in past 5 years

Overall PLFs of coal based plants to remain subdued at 73% in FY18

- Aggressive bidding and slow demand growth to restrict PLF of new plants to 67% by FY18 which is currently at ~50%

7 GW domestic coal based projects bid below Rs 3.1 / unit, which is required for equity IRR of 16%, are likely to see severe pressure on their profitability as per existing PPAs

SEB financials to improve led by FRP implementation, tariff hikes; revenue gap to be eliminated by FY18

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Source: CEA Source: MoC, MoPNG, Industry sources, CRISIL Research

3

Capacity additions have accelerated but PLFs declined

Source: CEA Source: PFC

203

134 9

11 20

20 8.7

0

50

100

150

200

250

FY'09 FY'10 FY'11 FY'12 FY'13 9M FY'14 Dec'13

Sharp growth in

capacity additions

(GW)

-2%

0%

2%

4%

6%

8%

10%

12%

FY

'09

FY

'10

FY

'11

FY

'12

FY

'13

Coal supply growth

CAGR: 4.5%

-40%

-20%

0%

20%

40%

60%

FY

'09

FY

'10

FY

'11

FY

'12

FY

'13

Gas supply growth

CAGR: 2.3%

78 78 75 74

70

65

58

67 66

60

40

25 20

30

40

50

60

70

80

FY'09 FY'10 FY'11 FY'12 FY'13 9M'14

Coal based PLFs Gas based PLFs (%)

2.93

3.40 3.55

3.97

4.39

4.71

2.70

3.07 3.15 3.33

3.69

4.19

2.5

2.8

3.1

3.4

3.7

4.0

4.3

4.6

4.9

FY'08 FY'09 FY'10 FY'11 FY'12 FY'13E

ACS ARR (Rs./kwh)

However, growth in fuel supply lagged capacity additions Sharp growth in installed capacity

Additionally, financial health of SEBs has worsened Consequently, PLFs have declined

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Reforms initiated, implementation remains poor

4

Compensatory tariff

In April 2013, CERC ruled that Adani Power and Tata Power be allowed to charge compensatory tariffs

Committee under Deepak Parekh has submitted recommendations state approval awaited

PUN, HAR have declined compensatory tariff, MAH has given conditional approval

Litigations could delay final decision & hurt cash flows

Power

Sector

Reforms

FSAs with CIL

CIL mandated to sign FSAs with 78 GW of capacities including cases with tapering linkage

As of 6th Sep-13, CIL had signed ~140 FSAs

Tapering linkage for 9 plants extended by 3 years Adani Power, Essar Power, Sterlite Energy to benefit

Positive move, however, lower ACQ levels would restrict PLFs

FRP

Under the FRP, 50% of ST liabilities will be taken over by state and balance restructured with banks for 3 years

As at December 2013, TN, RAJ, UP and HAR have implemented the FRP. Bihar, Jharkhand and AP to

implement scheme by Mar13

ACS-ARR gap to be eliminated by 2017-18; annual tariff hikes of 5-6% critical to ensure cost recovery

Imported coal cost pass through

In Jun13, allowed domestic coal linkage based plants to pass on the costs of coal imports to end consumers

CERC to suggest modalities for implementation of the higher fuel cost pass through to distribution companies

Delays/Litigations expected; well-structured mechanism is critical

New SBD for UMPPs

Fuel cost is a pass through; bidding based on fixed charge for 1st year of operations

Onus of land acquisition and clearances lies with developer

Loss on fixed costs due to low PAFs to be shared in 70:30 ratio by developers and SEBs

New UMPP guidelines de-risk developers but limit returns

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State Demand

(BU)

Supply

(BU)

Deficit

(%)

Gujarat 67.4 67.4 0

Madhya Pradesh 36.4 36.4 0

Rajasthan 42.1 42 0.3

Haryana 34.6 34.4 0.6

Maharashtra 93.7 92 1.9

Tamil Nadu 70 65.5 6.5

Andhra Pradesh 69.9 64.9 7.1

Uttar Pradesh 72.3 61.7 14.7

All India 753.7 720.1 4.5

Few large states witness decline in deficit Demand growth over FY08-13

5

Demand slowdown to add to power sector woes;

further impact offtake

Demand growth over FY14-18

Source: CEA, CRISIL Research

Weak discom financials & capacity constraints restricted power demand growth to 6.2 per cent over FY08-13

Power demand growth to slowdown to 5-5.5% CAGR over FY13-18 despite anticipated capacity additions and improvement in financials of state discoms

Weak GDP growth to restrict power demand growth from industrial and commercial segments,

Power deficit at near zero levels in Madhya Pradesh, Gujarat, Rajasthan and Haryana due to slowing demand growth

Southern states to drive demand on higher availability led by capacity additions and inter-regional connectivity

Demand slowdown to put pressure on PLFs and merchant realisations; also lead to delay in capacity additions

777 831

862

937

998

691 747

788

858 911

600

700

800

900

1000

1100

1200

1300

1400

FY'09 FY'10 FY'11 FY'12 FY'13

(BU)

Deficit:

11.1%

Requirement Availability

Source: CEA, Note: Data for April-Dec13

1009 1048

1116

1190

1290

968 1021

1095

1178

1284

FY'14P FY'15P FY'16P FY'17P FY'18P

Deficit:

0.5%

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Slowing demand, fuel issues & stretched player financials

to impact capacity additions

Source: CRISIL Research

CRISIL Research expects capacity additions of 55 GW over 2014-18 vis--vis 64 GW over the past 5 years

Pace of capacity additions to decline with slowdown in demand, delays in clearances, stretched financial position of developers

Pipeline of projects under construction on a decline as no new projects have been announced in the past 12-18 months

Coal based capacities to dominate as coal remains the cheapest and most widely available fuel source

Hydro capacities to account for 9% share; R&R issues and clearance delays to hamper capacity additions

Private sector to dominate capacity additions at 54 per cent on the back of large expansion plans

Large conglonmerates such as Adani Power, Reliance Power, Sterlite Energy and Essar Power to lead capacity additions

Central sector player NTPC to add ~ 9.5 GW of capacities; state sector to lag due to poor financial health

Project Developer MW

Nabhinagar NTPC 1000

Tilaiya UMPP Reliance Power 3960

Tori TPP Essar Power 1200

Vidharba TPP Lanco Infratech 1320

Bara TPP JVPL 1980

Bhavanupadu PTC 1320

Tamnar - II Jindal Power 1200

Source: CRISIL Research

103 103 106 97 94 92 88

0

20

40

60

80

100

120

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

(GW)

Source: CEA, CRISIL Research

21

15

12 9 10 9

0.0

5.0

10.0

15.0

20.0

25.0

FY

'13

FY

'14P

FY

'15P

FY

'16P

FY

'17P

FY

'18P

(GW)

Total Capacity addition (GW) Trend in projects under construction Projects unlikely to commission by FY18

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Slowing power demand and limited coal availability to

restrict PLFs

Coal PLFs to remain subdued over FY14-FY18

Slow power demand growth and limited domestic

coal availability to restrict PLFs

CIL production to grow at 5.5% CAGR over FY13-

FY17 against linkage based capacity growth of ~7%

CIL to supply only 65% of ACQ as per new FSAs

Additionally, aggressive bidding to limit increase in

PLFs of post 2009 plants to only 67%

Share of coal imports to decline over the long term

Slowdown in capacity additions

Increase in captive mine production by ~65 mn tonne

to relieve some pressure

Imported coal prices to remain range bound at $80-

$85 over 2013 and 2014

Source: CEA, CRISIL Research

Note: Imported coal - 5000 Kcal/kg, Domestic coal - 3500 Kcal/kg

Source: Ministry of Coal, CRISIL Research

11%

14% 16%

17% 18% 17% 16%

0%

5%

10%

15%

20%

-

200

400

600

800

FY'12 FY'13E FY'14P FY'15P FY'16P FY'17P FY'18P

Domestic Supply Imports Imports to consumption ratio

(MT

75%

70% 66% 67%

69% 70%

73%

51% 54%

57% 61%

64% 67%

40%

50%

60%

70%

80%

FY'11 FY'12 FY'13 FY'14 P FY'15 P FY'16 P FY'17 P

All coal based

(%)

Domestic supply and imports of non-coking coal for power

Average annual PLF of coal based power plants

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Source: SERCs, CRISIL Research

(22.3 GW)

Projects at risk

4,690

10,544

2,000

4,891

0

2,000

4,000

6,000

8,000

10,000

12,000

3.1 and above 2.9-3.1 2.6-2.9 Below 2.6

(MW)

7 GW of competitively bid domestic coal projects bid below Rs. 2.9/unit will see pressure on returns

CCEA has approved pass through of higher cost of imported coal for domestic linkage based plants

Well structured mechanism for tariff determination

required to avoid delays/litigations

GMR Infra has put its 600 MW coal based power plant on block; Adani Power has petitioned for

compensatory tariff for its Tiroda plant aggressive

bidding has led to operational losses in these projects

Tariffs of ~Rs. 3.1 per unit to provide equity

IRRs of 16% for domestic coal based plants

In the event of pass-through of imported

coal costs; levelised tariff required would be

lower at Rs. 2.9 per unit

Plant size of 600 MW; Capital cost of Rs 52 mn/MW

Domestic coal @ Rs. 1,460/tonne Annual cost escalation at ~4%

PLFs: 58% in Yr 1 ramping up to 70% in Yr 5; 70-75% for balance years

Imported coal blending at 15% in Year 1 declining to 5% in year 5; 5% blending thereafter

Debt equity ratio of 70:30

Source: CRISIL Research

IRRs sensitive to tariffs a 10 paise change in tariffs will improve IRRs by 150-200 bps

Domestic coal based plants require tariff of Rs. 3.1/unit to earn healthy

returns; ~7 GW of capacities at risk due to aggressive bidding

Competitively bid domestic linkage based projects Domestic Coal - Key Assumptions

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Weak discoms cater to ~30% of countrys consumption

9

Note: ACS ARR Gap is on subsidy booked basis; data as at Mar2012 Source: CRISIL Research

ACS-ARR Gap

(Rs./kwh)

AT&C loss

(%)

Accumulated

losses (Rs. Bn)

Weak states

Tamil Nadu (2.06) 19.9 (277.9)

Punjab (0.11) 20.6 (19.4)

Rajasthan (4.03) 24.2 (409.4)

Uttar Pradesh (0.76) 45.1 (301.8)

Orissa (0.17) 44.7 (54.8)

Moderate states

Haryana (0.95) 27.6 (101.4)

Andhra P 0.0 15.3 1.5

Madhya P (0.71) 38.3 (144.1)

Chhattisgarh (0.66) 29.6 (21.9)

Strong states

Karnataka (0.02) 24.5 (14.0)

Maharashtra 0.0 21.6 (46.5)

Gujarat 0.04 19.3 4.1

Delhi 0.19 18.6 16.7

West Bengal 0.03 32.9 (2.1)

All India (0.70) 27.0 (1,798.7)

Risk classification on the basis of discom health (financial & operational) as well as state

governments ability and willingness to support

Weakest states account for 30% of total power consumption & ~60% of accumulated losses

Rajasthan has the highest state government support through equity infusions and subsidy

State government support in Odisha limited due to privatisation of discoms

Moderate risk states account for 20% of power consumption & 15% of accumulated losses

MP and Haryanas relatively weak discom scores countered by stronger state support;

AP enjoys significant subsidy support, however, delays in subsidy payments impact risk profile

Despite strong financials, state willingness to support low in Chhattisgarh

Strong states account for 37% of power consumption &

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ACS-ARR Gap to be eliminated by 2017-18

10

8 states have so far approved implementation of FRP; these states account for around 50% of liabilities

FRP implemented in TN, RAJ, UP and Haryana; to be implemented in Andhra Pradesh Bihar and Jharkhand by

March14

Implementation of FRP in FY14 to reduce interest cost to 14p/kwh in FY15 from 34p/kwh in FY13

Cost reflective annual tariff hikes of 5-6% expected going forward to avoid further operational losses for discoms

Tariff hike of 6.5% implemented in FY14 following tariff hike of ~13% in FY13

On a subsidy booked basis, ARR to exceed ACS by 7 p/unit in 2017-18 at a pan-India level

However, few states such as Tamil Nadu, Madhya Pradesh and Uttar Pradesh to remain stretched due to high level of

regulatory assets

ACS: Average cost of supply, ARR: Average revenue realised

Source: PFC, CRISIL Research

Note: Revenue is on a subsidy booked basis

Source: PFC, State SERCs, CRISIL Research

Particulars FY12A FY13E FY18P

Revenue 3.69 4.19 5.76

Less: Expenses 4.39 4.71 5.69

Power Purchase 3.20 3.47 4.38

Interest cost 0.32 0.34 0.17

Other charges 0.87 0.90 1.14

(Gap) / Surplus (0.70) (0.52) 0.07

3.4 3.6

4.0

4.4 4.7 4.8

5.1 5.3

5.5 5.7

3.1 3.2 3.3

3.7

4.2 4.5

4.8 5.1

5.5 5.8

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

FY

'09

FY

'10

FY

'11

FY

'12E

FY

'13E

FY

'14P

FY

'15P

FY

'16P

FY

'17P

FY

'18P

ACS ARR

(Rs./kwh) Implementation

of FRP

ACS - ARR gap has widened to 70p/unit in FY12 Gap on subsidy booked basis for state utilities (Rs./kwh)

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