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Saturday, February 25, 2012

How power sector increasingly needs lobbying to navigate regulation/policy

On the face of it, one would liken the power sector to any other manufacturing/services firm that transforms raw materials into outputs. But for the power sector, the heavy interdependence of it on other sectors has resulted in its being affected by power games(including those it plays itself). The analysis follows below
  1. Land Acquisition:-In India, land and politics are inseparable, and when you throw in the heady cocktail of R&R(relief and resettlement) of project affected people who are displaced, things become really difficult. And India has very few land banks, which complicates matters. Companies would need quick ground work/lobbying to tie up favoured land parcels.
  2. Capital Goods import restrictions:-The 'China price' applies for power turbines as well, and naturally domestic producers like BHEL, L&T are not overjoyed. Press reports earlier this week hinted of a 18% import duty on imported capital goods, which would hike the capex cost of sector players, which even if allowed as pass through would increase capex needs. In this batttle of duty between consumers and producers, the producers seem to have won.
  3. China concern'-security issues:-This is so far only in telecom(insisting on source code etc), there are chances of standards etc being imposed in power sector also to target Chinese equipment, which would make imports from China more complicated.
  4. 'Force majure' coal prices hike endangering UMPPs;-The UMPP bidders had bid assuming coal prices to be 'business as usual'. But after the Indonesian export price lower ceiling and the Australian mining taxes, bidders are trying to get the Government to treat those taxes are force majure, otherwise the project may become unviable. While Tata Power merged Indonesian coal mines into itself to avoid net impact on itself, others have not done so. So the result of this lobbying would be interesting not only for power, but for all UMPPs
  5. Natural Gas Allocations-tussle with other sectors:- Presently, ONGC supplies about 28% of its gas to 'non priority' sectors like petrochemicals. And as RIL's gas supplies have not started as promised, there is this tussle for gas allocations, where affected sectors like power/fertilizers etc are jockeying with the eGOM(empowered Group of Ministers) to get the maximum allocation for their plants to avert idle capacity. All this unde
  6. Domestic coal supply uncertainty:-Earlier this month, Coal India was compelled to sign formal FSAs(Fuel Supply Agreements) with those producers to whom it had issued proforma letters of arrangement. While that reduced the fuel risk of those producers, it is surprising that a seemingly innocuous contract law issue had to be settled at the level of the Prime Minister's office
  7. Power Trading margin cap:-Companies like Jindal Power had minted money selling power on the open market, till the CERC stepped in with its monitoring, margin trading cap and other restrictions. While the segment is still very profitable, the El Dorado days are gone for now.
  8. 'Independent state regulators' delaying tariff hikes:-The very purpose of establishing 'independent regulators' under the Electricity Act 2003 was to reduce the risk of populist policies crowding out economic rationale. But in states like Delhi, UP etc, the regulators did not hike tariffs as requested/on time, thus making the distribution utilities incur losses and go on appeal for timely hikes, and the risk of a tariff shock looms ahead when the requested tariffs are passed
  9. SEBs delaying payments to generation utilities:-Even if companies generate and sell the power, the State Distribution utilities face power theft, remunerative prices and NPAs thus reducing their own cash flows and prompting them to delay payments to generators. Despite the implicit sovereign guarantee, delay in payments makes the recipient lose interest, and makes the stock market investors antsy. This fear is a major reason why private power stocks underperformed the broader market in 2011.
  10. Renewable energy Issues
    1. Subsidy dependent companies may suffer like their Spanish peers:- Spain was the poster child of solar energy till its bulging budget deficits made it pare those subsidies to the bone. In response, generators and equipment suppliers suffered. For subsidy dependent Indian players like solar, this is a big risk presently.
    2. Solar energy Price War due to bidding rules:-In the solar energy bids last year, new entrants were willing to supply solar energy at prices around 50%-60% of the benchmark ceiling. I'm sure the incubents will try pushing for track record/capitalization and other rules to prevent this becoming a frequent occurrence.
    3. No antidumping protection for Solar cell manufacturers:-Players like Moser Baer/Indosolar have been demanding anti dumping protection for their solar photovoltaic cells, but the Government has not relented till date. If it relents, the stocks will shoot up
    4. Food security concerns for biofuel:-While molasses or corn may seem the most logical feedstock, even Indian players are angling towards jatropha and rice husk where the accusations of 'fuel over food' will not arise. This is more of a global issue however.
Hence, any investor in the energy sector(to a lesser extent renewable energy) should be concerned about the political, regulatory and legal environment. The company with the best lobbyists would win many of the above disputes..

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