IPPs: Falling FO prices; blessing for sectors liquidity Written as on December 09, 2014 Furnace Oil (FO) prices has fallen by 20% since 31Oct14 as the government has passed-on the impact of declining intl oil prices in local market. In todays Value Seeker we provide a quick snapshot on liquidity relief to power sector when the price decline will fully incorporate. We further highlight the impact of falling FO prices on circular debt. Generation cost of IPPs to reduce significantly Average fuel cost component of IPPs remained at ~Rs14.1/kwh for the month of Nov14. IPPs usually use one month lag price data to calculate average fuel cost component for any month so Nov14 tariff has not accounted for FO price decline of 20% started from 1Nov14. However, Dec14 & Jan15 generation tariff will account for the said decline and resultantly average fuel cost component of FO based IPPs is likely to settle at Rs~12.9/kwh in Dec and ~10.8/kwh in Jan14. Any further decline in FO price may enhance benefits by further lowering the generation cost. Liquidity crunch of power sector to ease-off Energy sector of the country is facing severe liquidity turmoil mainly on rising electricity generation cost and poor distribution network. The worsening liquidity situation can be seen in table above where the overdue receivables/payables of 4 universe companies has risen significantly since last settlement of circular debt on 30th Jun13. Government is currently providing power subsidy mainly under the head of price differential claims (difference b/w generation cost & average price charged to consumer). The falling generation cost will ultimately gulp down the price differential claim and hence power subsidy. Opportunity cost of coal based generation increases Government is actively pursuing the coal based power generation and has signed many agreements with China to establish new coal power plants. Oil prices in intl market dipped by 40% since the start of FY15 as against coal prices decline of 10% during the said period. If the oil price stays at current level or further fall in medium term, it will increase the opportunity cost of establishing new coal based plants because the government can use spare capacity of FO/HSD based plants to bridge the electricity shortfall. Outlook: IPPs to shine further Going forward, we expect the IPPs will perform well on the back of i) Higher capacity utilization on decreasing generation cost ii) improve in liquidity situation and iii) rising opportunity cost of coal based generation. lrfan Saeed irfan.saeed@investcapital
Posted on: Wed, 10 Dec 2014 04:07:49 +0000
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