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● As per CERC’s existing norms, regulated projects, such as those
of NTPC, are required to maintain 85% plant availability (PAF) to
earn pass-through of fixed costs and assured RoE of 15.5%. Our
sensitivity analysis suggests that every 10% fall in PAF (due to
fuel deficits) impacts a regulated project’s earnings by 24%.
● Due to lower-than-adequate fuel supplies from Coal India, NTPC’s
Kahalgaon and Farakka projects (3.94GW) have been unable to
maintain 85% PAF and are earning disincentives or lower than the
assured RoE over the past few years. Coal supplies have been
impacted mainly due to delay in the development of Coal India’s
mines linked to these projects and logistical bottlenecks.
● Despite NTPC’s efforts to augment coal supplies at these projects
through spot/ imported coal purchases, Kahalgaon and Farakka
projects are unlikely to attain 85% target PAF in our view. Thus,
NTPC is currently petitioning the CERC for relaxation in the
normative PAF of 85% for these projects.
● We believe this petition is a key development to watch for the
sector as all projects under the regulated as well as competitively
bid Case I business models have a similar clause of 80-85% PAF
in order to recover their fixed costs/ earn returns. Hence, if this
petition is ruled in favour of the Farakka & Kahalgaon projects,
several other power developers could also voice similar requests
Kahalgaon/ Farakka earning disincentives from fuel deficits
NTPC follows the regulated cost-plus assured RoE business model.
However, the pass-through of these fixed costs and RoE is subject to
the project maintaining a threshold utilisation (PLF) or availability
(PAF). As per the CERC norms until 2001, NTPC’s Kahalgaon-I
(0.84GW) & Farakka (1.6GW) projects were expected to maintain
62.78% PLF. To achieve this target, these projects were granted coal
linkage of 10.95 mmtpa. Subsequently, the coal requirement
increased to 18-19 mmtpa based on new CERC regulations
(applicable from April 2009), requiring projects to maintain at least
85% PAF. The coal requirement has increased further to 27 mmtpa on
the commissioning of Kahalgaon-II project of 1.5GW in 2010.
As per an ongoing hearing with the CERC, NTPC claims to have
received a maximum of 10 mmtpa coal for these projects from Coal
India’s Rajmahal coal mines linked to these projects.
Figure 1: Coal needs for Kahalgaon & Farakka projects to comply with
CERC norms of assured RoE
Period CERC Norms Capacity (MW) Coal requirement (mtpa)
Until Mar 2001 62.78% PLF 2,440 11
April 2001- Mar 2009 80% PAF 2,440 15
April 2009 onwards 85% PAF 2,440 18-19
Present 85% PAF 3,940* 27
*Kahalgaon – II (1500 MW) commissioned in 2010. Source: Company data, CERC
Lower than adequate fuel supplies has resulted in PAF for these
projects being much below prescribed norm of 85%, despite NTPC’s
efforts to meet part of the deficit through spot coal/ imported coal
purchases. This has resulted in these projects earning disincentives
and eating into the assured RoE of 15.5%. NTPC claims that in the
last ten years, Farakka and Kahalgaon-I projects have suffered
disincentives for 5 years and 3 years respectively due to this issue.
Delay in coal mines development, logistics are key issues
Rajmahal mines are currently producing 10 mmtpa. Development at
Rajmahal expansion (7 mtpa), Chuperbhita (4 mtpa) and Hurra (3
mtpa) mines were expected to support the increase in coal needs of
these projects. However, as per media reports, delays in the
development of these mines and logistics bottlenecks (mainly
railways) are the key reasons for lower than required coal supplies.
NTPC exploring options to augment coal supplies
NTPC is planning to source some coal through waterways to address
the railway bottleneck. It is also blending 20-25% imported coal and is
meeting some coal needs through spot coal purchases at these
projects. Besides, Coal India is expected to increase its supply to 15
mmtpa for these projects over the next few years.
NTPC petitioning with CERC for relaxation of PAF norms…
Our sensitivity analysis suggests that these projects’ earnings would
be impacted by 24% for every 10% fall in PAF (from the prescribed
norm of 85% PAF). In view of continuing coal deficits, despite NTPC’s
efforts to augment coal supplies at these projects, NTPC is currently
petitioning the CERC to lower the normative PAF of 85% for Farakka
& Kahalgaon projects.
…would open flood gates for other developers, if allowed
All projects under the regulated cost-plus assured RoE model as well
as the competitively bid Case I projects have a similar clause of 80-
85% PAF to recover their fixed costs/ earn returns. Most domestic
linkage fuel-based projects commissioned after Mar 2009 (most
projects till Mar 2009 have fuel supply contracts and have high fuel
security) are likely to suffer because of fuel deficits impacting their
PAF/ returns. We thus believe the ongoing petition for Farakka/
Kahalgaon projects is a key development to watch in the sector as it
would translate into multiple such requests from project developers, if
it is ruled in favour of NTPC. The latest hearing on this issue was
scheduled for 6 September 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● As per CERC’s existing norms, regulated projects, such as those
of NTPC, are required to maintain 85% plant availability (PAF) to
earn pass-through of fixed costs and assured RoE of 15.5%. Our
sensitivity analysis suggests that every 10% fall in PAF (due to
fuel deficits) impacts a regulated project’s earnings by 24%.
● Due to lower-than-adequate fuel supplies from Coal India, NTPC’s
Kahalgaon and Farakka projects (3.94GW) have been unable to
maintain 85% PAF and are earning disincentives or lower than the
assured RoE over the past few years. Coal supplies have been
impacted mainly due to delay in the development of Coal India’s
mines linked to these projects and logistical bottlenecks.
● Despite NTPC’s efforts to augment coal supplies at these projects
through spot/ imported coal purchases, Kahalgaon and Farakka
projects are unlikely to attain 85% target PAF in our view. Thus,
NTPC is currently petitioning the CERC for relaxation in the
normative PAF of 85% for these projects.
● We believe this petition is a key development to watch for the
sector as all projects under the regulated as well as competitively
bid Case I business models have a similar clause of 80-85% PAF
in order to recover their fixed costs/ earn returns. Hence, if this
petition is ruled in favour of the Farakka & Kahalgaon projects,
several other power developers could also voice similar requests
Kahalgaon/ Farakka earning disincentives from fuel deficits
NTPC follows the regulated cost-plus assured RoE business model.
However, the pass-through of these fixed costs and RoE is subject to
the project maintaining a threshold utilisation (PLF) or availability
(PAF). As per the CERC norms until 2001, NTPC’s Kahalgaon-I
(0.84GW) & Farakka (1.6GW) projects were expected to maintain
62.78% PLF. To achieve this target, these projects were granted coal
linkage of 10.95 mmtpa. Subsequently, the coal requirement
increased to 18-19 mmtpa based on new CERC regulations
(applicable from April 2009), requiring projects to maintain at least
85% PAF. The coal requirement has increased further to 27 mmtpa on
the commissioning of Kahalgaon-II project of 1.5GW in 2010.
As per an ongoing hearing with the CERC, NTPC claims to have
received a maximum of 10 mmtpa coal for these projects from Coal
India’s Rajmahal coal mines linked to these projects.
Figure 1: Coal needs for Kahalgaon & Farakka projects to comply with
CERC norms of assured RoE
Period CERC Norms Capacity (MW) Coal requirement (mtpa)
Until Mar 2001 62.78% PLF 2,440 11
April 2001- Mar 2009 80% PAF 2,440 15
April 2009 onwards 85% PAF 2,440 18-19
Present 85% PAF 3,940* 27
*Kahalgaon – II (1500 MW) commissioned in 2010. Source: Company data, CERC
Lower than adequate fuel supplies has resulted in PAF for these
projects being much below prescribed norm of 85%, despite NTPC’s
efforts to meet part of the deficit through spot coal/ imported coal
purchases. This has resulted in these projects earning disincentives
and eating into the assured RoE of 15.5%. NTPC claims that in the
last ten years, Farakka and Kahalgaon-I projects have suffered
disincentives for 5 years and 3 years respectively due to this issue.
Delay in coal mines development, logistics are key issues
Rajmahal mines are currently producing 10 mmtpa. Development at
Rajmahal expansion (7 mtpa), Chuperbhita (4 mtpa) and Hurra (3
mtpa) mines were expected to support the increase in coal needs of
these projects. However, as per media reports, delays in the
development of these mines and logistics bottlenecks (mainly
railways) are the key reasons for lower than required coal supplies.
NTPC exploring options to augment coal supplies
NTPC is planning to source some coal through waterways to address
the railway bottleneck. It is also blending 20-25% imported coal and is
meeting some coal needs through spot coal purchases at these
projects. Besides, Coal India is expected to increase its supply to 15
mmtpa for these projects over the next few years.
NTPC petitioning with CERC for relaxation of PAF norms…
Our sensitivity analysis suggests that these projects’ earnings would
be impacted by 24% for every 10% fall in PAF (from the prescribed
norm of 85% PAF). In view of continuing coal deficits, despite NTPC’s
efforts to augment coal supplies at these projects, NTPC is currently
petitioning the CERC to lower the normative PAF of 85% for Farakka
& Kahalgaon projects.
…would open flood gates for other developers, if allowed
All projects under the regulated cost-plus assured RoE model as well
as the competitively bid Case I projects have a similar clause of 80-
85% PAF to recover their fixed costs/ earn returns. Most domestic
linkage fuel-based projects commissioned after Mar 2009 (most
projects till Mar 2009 have fuel supply contracts and have high fuel
security) are likely to suffer because of fuel deficits impacting their
PAF/ returns. We thus believe the ongoing petition for Farakka/
Kahalgaon projects is a key development to watch in the sector as it
would translate into multiple such requests from project developers, if
it is ruled in favour of NTPC. The latest hearing on this issue was
scheduled for 6 September 2011.
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