Govt may cap tariff rates for merchant power

The entire power sector has been under pressure mainly on the back of a media report that came out yesterday. The reports suggested that the Ministry of Power is proposing to cap tariff sold from power projects, which have captive coal blocks or assured domestic coal linkages. CNBC-TV18's Priyanka Dalmia reports.

This might be another move towards aiding distribution companies (DISCOMs), which will also benefit consumers. As per this media report, the fuel pass-through will be dependent on actual cost. The independent power producers, not adhering to this move, will suffer when it comes to getting additional linkages for the future.
There is some lack of clarity with regard to this policy initiative. For instance, we do not know what it means for power projects that have existing power purchase agreements and also what the tariff cap is expected to be like. However, if this policy initiative goes through, it is a definite negative for power companies, selling in the merchant power markets and also future power projects of independent power producers.
In general, this will act as a deterrent for efficient operations and power generation, as it is a reversal from independent market driven prices that policies have been moving towards in recent times. This will also act as a deterrent towards auctioning of coal blocks by the government and also development of the captive coal blocks by private companies.
Coming to the stock specific impact, JSPL is the most impacted. This stock has been beaten down the most since yesterday. Approximately 75-85% of power sold by JSPL is in merchant markets and its entire fuel supply comes from captive coal blocks. Other stocks to be impacted are Lanco, JSW Energy, Adani Power, Sterlite and JP Power. But, in general, all power companies have been beaten down as a result of this report.