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UBS Investment Research
India Power Utilities
No linkage coal for merchant projects?
„ Event: govt may not provide domestic linkage coal for merchant plants
According to media reports, for the next 12th Five Year Plan (FY13-17), the
government is considering a change in coal linkage policy for power projects. It
may propose to provide linkage coal (from Coal India) to only those projects that
sell power either through regulated return-based power purchase agreements (PPA)
or competitive bid-based capacities. Currently, the coal linkage policy only looks
at the projects’ progress and does not differentiate on the basis of power sale
arrangements.
„ Impact: more projects would be based on long-term PPAs
If implemented, we believe this would be negative for India’s merchant power
capacity growth. Merchant tariffs declined significantly over past two years (50%
decline in FY11 from FY09) and if a cheaper source of fuel (linkage coal is 50-
70% cheaper than imported coal and other sources) is also taken away, the
incentive for a developer to set up highly risky merchant capacity would diminish
further. We think this is good for the sector as return expectations would become
more realistic and only serious long-term developers would remain in the space.
„ Action: we prefer companies with low fuel supply risk
In a scenario of negative developments on domestic coal availability for utilities,
investors may look for companies that have fuel cost pass-through (NTPC,
Reliance Infrastructure) or utilities with access to domestic captive fuel (Reliance
Power).
„ Our top pick: Power Grid, rated Buy
We prefer Power Grid and Lanco Infratech. We also have a Buy rating on NTPC,
Tata Power and Reliance Infrastructure
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Power Utilities
No linkage coal for merchant projects?
„ Event: govt may not provide domestic linkage coal for merchant plants
According to media reports, for the next 12th Five Year Plan (FY13-17), the
government is considering a change in coal linkage policy for power projects. It
may propose to provide linkage coal (from Coal India) to only those projects that
sell power either through regulated return-based power purchase agreements (PPA)
or competitive bid-based capacities. Currently, the coal linkage policy only looks
at the projects’ progress and does not differentiate on the basis of power sale
arrangements.
„ Impact: more projects would be based on long-term PPAs
If implemented, we believe this would be negative for India’s merchant power
capacity growth. Merchant tariffs declined significantly over past two years (50%
decline in FY11 from FY09) and if a cheaper source of fuel (linkage coal is 50-
70% cheaper than imported coal and other sources) is also taken away, the
incentive for a developer to set up highly risky merchant capacity would diminish
further. We think this is good for the sector as return expectations would become
more realistic and only serious long-term developers would remain in the space.
„ Action: we prefer companies with low fuel supply risk
In a scenario of negative developments on domestic coal availability for utilities,
investors may look for companies that have fuel cost pass-through (NTPC,
Reliance Infrastructure) or utilities with access to domestic captive fuel (Reliance
Power).
„ Our top pick: Power Grid, rated Buy
We prefer Power Grid and Lanco Infratech. We also have a Buy rating on NTPC,
Tata Power and Reliance Infrastructure
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