CCEA: IIFL sees no immediate benefit for power producers

A: Prima facie it appears that quite a lot of projects will tend to benefit out of these relaxed norms. Key to be noted out here is two fold, the intent that 65 percent power needs to be tied up given the state of distribution companies, at least over the next 2-3 years the power producers will be more than happy to tie up 100 percent of power on long-term basis rather than keeping any power unsold in the open market.

Secondly also what needs to be taken into account is actual supplies from Coal India, that is if the power project is based on domestic coal, it will commence only if the power is tied up. If there is an untied capacity then Coal India will not essentially supply coal to that extent to that particular power plant. So, benefits of this policy will be varied to a great extent depending on what type of fuel mix is used by the project and what capacity is tied up. Therefore the benefits may not be equal across the number of projects that you have talked about.

Q: Would this then mean that these power producers would be able to sell more power outside the PPA and therefore gain more margins? Or is it that the regulated tariff percentage of 35 percent does not provide any upside?

A: Over a long period of time as the merchant tariffs settle to a more realistic level the benefit of such policy will only emerge say beyond next five-seven years. However, in the near term, if you look at the trend of merchant power markets in India it is a bit subdued. There the volume or rather transactions are bit constrained. Therefore in the near term the power producers may not be able to get immediate benefit out of this policy.

In the longer run this will only help boost the project IRR for these projects which are under consideration. In the near term it needs to be seen how well the coal supplies will be monitored rather mobilized, how these companies end up tying the power which will be generated out of these projects.

So, one needs to take a differentiated approach rather than generalising the benefits of this particular policy. Definitely it appears to be a move in the right direction.