Sector Update | 7 July 2017
Utilities
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DISCOMs getting more efficient in power purchase
Long-term PPAs may remain elusive; Buy PWGR, NTPC
Refer to our report
on Utilities, July 2016
DEEP, a recently created electronic market for merchant power, has not only
substituted bilateral transactions (thus weeding out corruption in power
purchases), but has also helped states to reduce overall power purchase cost.
States are sourcing peak load requirements rather than signing long-term PPAs
where they have to incur fixed cost for full day. Our data analysis suggests that
UP and Torrent DISCOMs are among the key beneficiaries.
DEEP also provides a peek into the evolving demand-supply. As the share of
renewable energy increases in the grid, the variability in conventional power
generation will increase during a typical day. We expect DISCOMs to
increasingly use merchant power to optimize power purchase costs and shy
away from signing new long-term PPAs.
The merchant market (e.g. DEEP) will also help in directing investment in
connecting low cost power to demand centers and handling variability in load.
Demand-side management tools like “time of day tariff” will evolve. We
expect rates for peak demand hours to rise gradually, which will encourage
better utilization of hydro and gas power.
We continue to like regulated business models of PWGR and NTPC. We also
like CESC for its strong distribution franchise and value unlocking through
splitting into concentrated businesses. We also like JSW Energy for its ability
to benefit from the stress in the power sector, given its strong balance sheet.
Refer to our report
on Utilities, February 2017
The government had launched ‘DEEP’, a reverse bidding electronic platform for
power purchase in April 2016. The objective was to make DISCOM power purchases
transparent, moving away from bilateral transactions in the earlier set-up. All
purchases by DISCOMs that are less than one year and not day-ahead need to
happen on ‘DEEP’.
Since its launch, ‘DEEP’ has scaled up materially. It has gained market share of ~3%
within a year of its launch, equal to IEX, which has been in existence for more than
five years (Exhibit 1). The data from ‘DEEP’ provides interesting insights:
DISCOMs are getting efficient in their power purchase
‘DEEP’ provides flexibility not only on the months over which power can be
purchased, but also the time of day it is needed. DISCOMs can thus plan their
purchases to match their peak load requirement. Long-term PPAs can be signed for
the base load needs (and thus, utilized optimally) and peaking power (time of day)
contracts can be entered into to match demand load. This is already happening on
‘DEEP’. Of the ~34BU traded on ‘DEEP’, about one-third of the power is time-of-day.
Prominent are states like Bihar and Uttar Pradesh, which have higher share of
residential consumption and more variable (peaking) load (Exhibit 2). How UP is
saving with time-of-day contracts is mentioned in detail below. Interestingly, and to
our surprise, the price gap between full day and time-of-day tariff is insignificant
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
8 August 2016
Sanjay Jain
(SanjayJain@motilaloswal.com@MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal
(Dhruv.Muchhal@motilaloswal.com@MotilalOswal.com); +91 22 3027 8033
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Utilities
(Exhibit 3). DISCOMs should use this opportunity to get more efficient in their power
purchase decisions. Such a trend is negative for untied capacities that are seeking
long-term PPAs. We have highlighted in our reports earlier that DISCOMs have
already signed more than enough PPAs (link
to the report).
Short-term and time-of-
day contracts would be the way forward, in our view.
DEEP is indicative of future prices
Purchases on ‘DEEP’ are planned in advance and can go up to purchases for the next
twelve months. This provides a future trend of prices. A comparison with the IEX
day-ahead prices suggests that there is a strong correlation with the prices on
‘DEEP’, which are determined in advance (see Exhibit 4). Generators based on the
data from ‘DEEP’ can better plan their power sales.
Highlights from a few DISCOM transactions on DEEP
Uttar Pradesh – cancelling of recent PPA bids has been economical
Uttar Pradesh (UP) recently cancelled its tender for ~2GW long-term PPA. The L1
price in the bid was INR3.96/kWh. Alternatively, UP is actively purchasing on ‘DEEP’.
It is sourcing at an average price of INR3.69/kWh. More importantly, UP is buying for
time-of-day, primarily between 00-05 hours and 17-24 hours. By not signing the
long-term PPA, it is not only getting cheaper power, but is also saving the fixed cost
it had to pay under a PPA for the 12 hours when it does not need the power.
Torrent Power (Not Rated) – getting cheap power
In a bid in February 2017, Torrent Power DISCOM got a 32MW contract for one year
at a price of INR2.7/kWh. The price is significantly lower than if were to source from
its untied UnoSugen gas-based power plant (which even at current gas prices will
have a variable generation cost of INR3.5/kWh). In such a scenario, it will be difficult
for Torrent Power to justify a PPA for its UnoSugen plant even though it is a
brownfield expansion.
Maharashtra – short-term gaps benefit CESC
Maharashtra is well supplied in power. It has signed more than enough PPAs such
that 7-8GW of PPA capacity is back-down for lack of demand. Despite this,
Maharashtra was on the ‘DEEP’ platform for May and June for 500MW. CESC’s
Dhariwal power plant was a beneficiary, as it secured 150MW in both the months at
~INR3.6/kWh; this is an upside, as we are not factoring merchant sales from its idle
300MW capacity in our model for CESC. We estimate Dhariwal would have earned a
contribution margin of INR1.1-1.3/kWh on these contracts.
Long-term PPAs unlikely until alternates like ‘DEEP’ remain economical
DEEP is not only helping DISCOMs to improve power purchases and optimize cost, it
can also help generators in planning. It also provides a peek into the evolving
demand-supply. As the share of renewable energy increases in the grid, the
variability in conventional power generation will increase during a typical day. The
merchant market (DEEP, for instance) will help in directing investment towards
correct technologies to handle variability in load and create the need for demand-
side management. We expect DISCOMs to shy away from signing long-term PPAs in
view of changing load profile. Gradually, it will also ease the need for regulations.
7 July 2017
2

Utilities
We continue to like regulated business models of PWGR and NTPC. We like CESC for
its strong distribution franchise and value unlocking through splitting into
concentrated businesses. We also like JSW Energy for its ability to benefit from the
stress in the power sector, given its strong balance sheet.
DEEP has gained market
share of ~3% in one year of
its launch
Exhibit 1: Volumes on DEEP and IEX
DEEP - b kwh
5.0
4.0
3.0
2.0
1.0
0.0
0.1
0.3
1.1
1.1
1.4
1.7
1.1
2.3
IEX - b kwh
DEEP share of conv. generation - %
2.9
2.9
3.1
3.0
3.0
Source: MOSL, DEEP, IEX
Exhibit 2: Summary of transactions on DEEP
DISCOM
Punjab
Karnataka
Rajasthan
Bihar
Chhattisgarh
Uttar Pradesh
West Bengal
Uttarakhand
Torrent
Tamil Nadu
Maharashtra
Mumbai
Delhi
Haryana
Telangana
Noida
Kerala
Private
Goa
Jharkhand
Assam
Grand Total
Full day
4,577
5,152
3,621
761
1,379
1,391
1,473
280
881
1,094
190
459
488
395
336
221
109
in m kwh
Time-of-day
875
Total
5,452
5,152
3,621
3,502
3,020
2,469
1,870
1,657
1,590
1,120
1,095
904
632
488
395
344
307
121
106
56
45
33,945
% Time-
of-day
16
Full day
2.9
4.2
2.8
4.7
2.8
3.2
2.7
2.7
3.1
3.4
2.8
4.1
4.7
5.9
3.6
3.3
3.5
in INR/kWh
Time-of-day
2.8
Total
2.9
4.2
2.8
2.9
3.3
2.9
2.8
3.7
3.7
2.8
3.1
3.3
2.8
2.9
2.8
4.0
3.3
3.8
3.4
2.9
2.9
3.6
3.9
4.7
5.9
4.2
3.6
3.5
3.3
3.4
3.5
3.0
3.0
3.0
3.0
4.8
3.1
3.3
Source: MOSL, DEEP
2,741
1,641
2,469
478
185
1,310
238
1
714
173
78
54
100
26
11
82
21
79
27
8
86
12
106
56
11,093
45
22,852
2
28
10
100
100
0
33
4.8
3.4
7 July 2017
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Utilities
Exhibit 3: DEEP prices for full day and time-of-day contracts (INR/kWh)
Full day
4.0
3.5
3.0
2.5
2.0
Time of day
Source: MOSL, DEEP
DEEP prices provide a trend
on direction of the market
Exhibit 4: Prices on DEEP and IEX (INR/kWh)
DEEP
4.0
3.5
3.0
2.5
2.0
IEX
Source: MOSL, DEEP, IEX
Exhibit 5: Utilities sector valuation
Rating
Powergrid
NTPC
JSW Energy
CESC
Tata Power
Coal India
Buy
Buy
Buy
Buy
Sell
Buy
CMP
(INR)
210
159
68
875
82
248
EPS
MCAP
(INR) down % USDm FY17E FY18E
242
198
85
1,140
68
315
15
25
26
30
-16
27
17,087
20,345
1,726
1,811
3,429
24,290
14.2
16.7
3.9
51.9
7.4
15.9
17.6
13.4
3.2
78.6
6.4
18.7
TP
Up/
P/E (x)
FY19E
20.6
16.2
3.1
86.0
6.7
20.9
FY18E
11.9
11.9
21.5
11.1
12.8
13.2
FY19E
10.2
9.8
21.6
10.2
12.2
11.8
P/B(x)
FY18E
2.0
1.3
1.0
1.5
1.7
6.1
FY19E
1.7
1.2
1.0
1.3
1.3
6.1
RoE (%)
FY18E
17.5
10.9
4.9
14.4
13.9
46.4
FY19E
17.8
12.3
4.8
13.9
12.1
51.8
Source: MOSL, Company
7 July 2017
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Utilities
NOTES
7 July 2017
5

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Utilities
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