Execution delays and low tariffs pose double trouble for NHPC

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Execution delays and the resultant rise in costs can deepen operating challenges for NHPC Ltd. Several of the company’s hydropower generation projects are facing cost overruns. As the additional expenditure raises project costs and break-even tariffs, prices can become unpalatable for buyers.

Three upcoming projects have seen cost overruns in the range of 61% to 177% from their initial capital expenditure estimate, Emkay Global Financial Services Ltd’s calculations show. Of these, tariff for one project has been signed at around Rs4.19 per unit. According to Emkay’s calculations, tariff for the large Subansiri project is working out to Rs4.6 per unit. In comparison, the average tariff of NTPC Ltd stood at Rs3.21 per unit in the first half of the current fiscal year.

An expert who tracks the sector says that delays and cost overruns have become commonplace for hydropower projects.

As a result, some projects are commissioned after securing a power purchase agreement (PPA) which shields companies when tariffs fall, the expert says. In practice, NHPC’s projects are usually assured of PPAs by some states although formal agreements are signed later.

The expert cited above says buyers or the power distribution companies (discoms) may delay the commencement of the relatively expensive PPAs. However, they cannot completely wish away the signed contracts.

Even so, given cheaper alternatives in the market place, power distribution companies, or discoms, may well curtail their purchases from NHPC. There have been several instances of discoms turning from expensive PPAs to the spot power markets to meet their electricity requirements over the last two years.

Further, as the recent experience in the renewable energy sector shows, discoms curtailed power purchases or asked for tariff renegotiation when tariffs fell below contracted rates. While aggrieved developers went to court and even the central government advised against such renegotiations, such back-outs and payment delays by discoms are a common practice.

According to Emkay, NHPC is undertaking several initiatives to lower tariff rates—refinancing of debt and charging depreciation for the entire life of the asset. A successful execution of these plans will ward off concerns about NHPC’s competitiveness to some extent. Evidently, investors don’t seem all that convinced. The NHPC stock is down 20% from its highs in June.