SINGAPORE (S&P Global Ratings) Jan. 9, 2024--India's proposed power-tariff review norms clear a path for continuity. The country's Central Electricity Regulatory Commission's (CERC) recently announced draft tariff regulations support new power-sector investments and credit profiles of entities in this sector. The assured regulated returns with full cost pass-through continue. We anticipate only slight changes to credit metrics versus those assumed under the previous five-year control period.
"The proposed lower return on equity [ROE] for new transmission lines at 15% against 15.5% earlier will not move the needle much," said S&P Global Ratings credit analyst Rachna Jain. "A 50 basis-point reduction in ROE reduces a regulated project's earnings after tax by about 3%, but EBITDA by only about 1%." Most transmission projects in India are anyways now awarded through tariff-based competitive bidding.
The draft norms will apply from April 1, 2024, till March 31, 2029, on thermal and hydropower generation projects, and transmission lines that are regulated by CERC. The stable availability-based regulatory rate of return with full cost pass-through underpins Power Grid Corp. of India Ltd. (BBB-/Stable/--), NTPC Ltd. (BBB-/Stable/--) and NHPC Ltd.'s (BBB-/Stable/--) strong cash-flow predictability. The well-established regulatory framework with a long record continues to support the regulated assets of the issuers.
The draft regulations maintain ROE for existing operational power generation and transmission assets, in line with our expectations. The regulator proposes to increase ROE to 17%, from 16.5%, for new storage-type hydro power projects, pumped-storage hydro projects, and run-of-river generating stations with pondage. This modest adjustment reflects operators' risk and will spur investment, in our view.
Thermal projects will also benefit from additional incentive income at 1% of annual fixed-revenue requirements. The equivalent extra incentive income for hydro generation projects will be 4%. Additionally, thermal assets will receive peak-period incentive income at 75 paise/kilowatt hour versus 65 paise/kilowatt hour earlier.
In setting the tariff structure, the regulator's assumed 6% annual escalation in operation and maintenance expense over the next five years mitigates inflation risk. The equivalent cost increase over the prior control period was 4% to 5%.
This report does not constitute a rating action.
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| Primary Credit Analyst: | Rachna Jain, Singapore 65306464; rachna.jain@spglobal.com |
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