Presentation of a research work along with Financial Modeling carried out to demonstrate the financial impact of FRP and implementation of smart grids on Indian discoms. (2014)
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Repowering Indian Discoms - Academic Research
1. Repowering the Indian DISCOMS:
Impact of Financial Restructuring and Smart Grid
Technology on Business Viability
-Aditya Parchure
2014
2. Background
• The ironic truth about Indian Power Sector
• ACS > ARR
• ATC losses
• Debt Restructuring Package of 1.9 lakh Crore
• The role of Smart Grids
3. Lead Questions
• What factors are actually contributing to current
financial state of DISCOMs?
• How are DISCOMs treating the FRP on their Balance
sheet?
• What is the impact of this FRP on future cash flows of
the DISCOMs?
• Can Smart Grids serve as a long term sustainable
solution for profitable operations of DISCOMs?
4. Financial Restructuring Package
• The FRP has 3 parts to it as follows:
• The financial package consists of conversion of 50% of short term
liabilities into bonds to be issued by DISCOMs and duly backed and
taken up by the state government in a phased manner.
• Balance 50% of the Short term liabilities will be rescheduled by
lenders and serviced by the DISCOMs with moratorium of 3 years
on principal.
• The Central government could also play a role in the FRP through an
incentive based Transitional Finance Mechanism. This incentive is
based on performance of DISCOMs in reducing the ATC loss levels
over and above the stipulated RAPDRP (Restructured- Accelerated
Power Development and Reform Program) targets.
5. Movement of funds
Note : The issuance of bonds by Discoms will transform these STLs in to Long Term
Liabilities with the new cost of borrowing. Subsequently these liabilities would be
converted to SG equity on discom books
6. Package Disbursement –PHASE 1
• Financial Statements : TANGEDCO
• Phase 1 disbursement2 :
FRP Package
disbursement 2013 2014 2015 2016
For Tamil Nadu 50% of STL 14944.70
Disbursement in % 54.76% 19.32% 6.89% 19.03%
Disbursement in value 8183.00 2887.00 1030.00 2844.71
% of restructured loan 20.53% 25.89% 27.64% 32.05%
Values in Cr INR
7. Base Case Assumptions
Assumptions : Reference
Consumer Base 23,000,000 India Infra research
ATC Losses 19.14% India Infra research
Operating cost increase 4.0% IIR /PFC report
Collection Efficiency 98.0% India Infra research
Growth in Revenues (due to increase in demand) 9.7% India Infra research
Growth in Cost 4.0% India Infra research
Subsidy as a % of rev 11.4% P&L Statement 2011-12
Increase in power purcahse 14.0%-16.0% India Infra research
ARR w/o subsidy in Rs/kWh 3.04 PFC report 2011-12
ACS in Rs/kWh 5.4 PFC report 2011-12
TAX rate 30.0% Assumption
CAPEX growth 10.0% India Infra research
NWC as a percentage of revenue including subsidy -74.0% Balance sheet 2011-12
Cost of capital (original) 10.38% Calculated as given
Growth in Tariff in 1st yr and 2nd year 37%, 4% Infraline
8. Base Case Assumptions
– Cash inflow occurring from FRP will be only be used to
settle the short term liabilities resulting in changes in
NWC
– Banks and Power Generators would stop providing
Short term loans and credits
– The analysis does not take into account any principal
repayment or consequent capital reimbursement
(25%) from GoI to the State Governments.
– Growth in Tariff have been considered as announced
in that particular state
9. Scenarios
Sr no. Scenario - Operation Scenario - Financing
1 Status Quo operations
Bond issues with SG guarantee.
Bond issued taken over by SG completely.
2 Improved operations
Bond issues with SG guarantee.
Bond issued taken over by SG completely.
3 Status Quo operations
Bond issues with SG guarantee.
Bond issued not taken over by SG
4 Improved operations
Bond issues with SG guarantee.
Bond issued not taken over by SG
10. Cost of Capital Calculations
• Cost of Debt Kd : Interest/Long Term Debt = 13.4%
• Cost of restructure debt3 = 8.9%
• Cost of Equity Ke4 : 15 %
• Cost of Capital = Kd(1-T)*D/V + Ke *E/V
• Effect of FRP on WACC , D/V , E/V
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0
202
1
202
2
WACC 10.3 9.86 9.72 9.68 9.56 10.0 10.0 10.0 10.0 10.0 10.0
9.00%
9.20%
9.40%
9.60%
9.80%
10.00%
10.20%
10.40%
10.60%
WACC
WACC – Take over (as per FRP)
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0
202
1
202
2
WACC 10.3 9.86 9.72 9.68 9.56 9.56 9.56 9.56 9.56 9.56 9.56
9.00%
9.20%
9.40%
9.60%
9.80%
10.00%
10.20%
10.40%
10.60%
WACC
WACC – No Take over
11. Scenario: Status Quo Operations
ValuesinCroreINR
Year
-40000.00
-20000.00
0.00
20000.00
40000.00
60000.00
80000.00
100000.00
1 2 3 4 5 6 7 8 9 10
Operation
Revenue from Sale of Power Purchase of Power
EBIT Revenue subsidies & Grants
12. Scenario: Status Quo Operations
NPV -106,107 Cr INR
NPV -109,832 Cr INR
(20,000.00)
(15,000.00)
(10,000.00)
(5,000.00)
-
5,000.00
10,000.00
1 2 3 4 5 6 7 8 9 10
Cashflow without FRP
FCF without FRP DCF without FRP
Year
ValuesinCroreINR
-25000.00
-20000.00
-15000.00
-10000.00
-5000.00
0.00
5000.00
10000.00
15000.00
20000.00
1 2 3 4 5 6 7 8 9 10
Cashflow with FRP
FCF with FRP DCF with FRP
ValuesinCroreINR
Year
13. Inference so far
• FRP which improves cash flow temporarily is showing no real benefit if the
operating side remains as it is
• Cost of purchase of power is more than the revenue from sale of power in
the zeroth yr, and its growth rate is very high (> 15%), which is over
powering increase in revenues even after tariff increase
• FRP is helpful in bringing down the cost of capital marginally
• Expectation that Discoms will be cash surplus by the end of phase 1 could
prove to be false
• Future value of the discom will only improve if there is serious degree of
improvement in operating side
14. Scenario: Improved Operations
• Assumptions
– Power purchase cost grow at a lower rate of as compared to all India
CAGR i.e @ <15 % as State Generation improves
– Improvement ATC loss by 1.5 % per annum
• Improvement in Billing Efficiency by 1.81% p.a.
• Improvement in Collection Efficiency by 0.05% p.a.
– Average tariff hike in 8th year – say @ 12 %
– Cost of restructured loan @ 8.9%
– Capex investment growth of 10% p.a. ( no change)
15. Scenario: Improved Operations
-20000.00
0.00
20000.00
40000.00
60000.00
80000.00
100000.00
1 2 3 4 5 6 7 8 9 10
Operation
Revenue from Sale of Power Purchase of Power
EBIT Revenue subsidies & Grants
ValuesinCroreINR
Year
-10000.00
-5000.00
0.00
5000.00
10000.00
15000.00
20000.00
1 2 3 4 5 6 7 8 9 10
Cashflow with FRP
FCF with FRP DCF with FRP
ValuesinCroreINR
Year
NPV 65,681 Cr INR
0.00
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
120,000.00
17.91%
16.38%
14.83%
13.24%
11.63%
9.98%
8.31%
6.60%
4.86%
3.09%
TotalRevenue
ATC Loss
TOTAL
17. What is a Smart Grid?
PED has started billing of consumers on the
basis of online metering data of Smart Meters
Tamper cases are being detected
DT wise Energy accounting/audit
Unbalancing in transformer loading identified
Direct SMS is sent to concerned engineer in
case of any fault in line
57% savings in consumption achieved by
automation of Street Lighting
Improvement in voltage profile, reduction in
losses, improved supply quality
Integration of roof top Solar PV with net
metering: net zero energy homes, reduction
power bills
Electric vehicle with solar charging
18. SMART GRID PILOT PROJECT : COST BENEFIT & SCALABILITY ANALYSIS
Puducherry Pilot Project
No of consumers 87031 nos. ATC loss = 1- ( Collection eff * Billing eff)
Residential 79% %
Residential in nos. 68754 Cr INR For Puducherry pilot project
Total Project cost in Cr 46.11 Cr. INR Earlier After
Expected ATC loss reduction 14% % ATC loss 22.60% ATC loss 8.86%
Total Energy consumption 367 MU Collec eff 90% Collec eff 98%
Improvement in Coll Eff 8.0% % Bill eff 86% Bill eff 93%
Time line 1.6 year
Loss reduction per anum 9% %
Improvement in Bill Eff 7% % For TANDEGCO –considered improvement in Bill Eff only
CAPEX 46.11 Cr INR Earlier After
CAPEX per year 29.1 Cr INR ATC loss 19.41% ATC loss 17%
CAPEX per yr /domestic cons 0.000423567 Cr INR Collec eff 98% Collec eff 98%
CAPEX for TANGEDCO 6539.87 Cr INR Bill eff 82.23%
Bill eff
improved 84.3%
Consumer Profile TANGEDCO Results
Consumer Nos. Units % units Bill Eff improved 2.10%
Industry consumption 550000 21235 37% CAPEX in Cr. INR 6539.87
Domestic consumer 15440000 17131 30%
CAPEX in Cr.INR for 1%
improvement in bill eff 3114.22
Commercial consumer 2980000 4755 8%
CAPEX in Cr INR reqd for
1.81% improvement 5636.74
Agriculture consumer 2020000 10425 18%
Others 2360000 3429 6%
Total 56975 100%
19. Valuation Results
Sr no. Scenario - Operation Scenario - Financing NPV in Cr INR
1 Status Quo operations
Bond issues with SG guarantee.
Bond issued taken over by SG
completely. (as per FRP)
(109,832.70)
2 Improved operations
Bond issues with SG guarantee.
Bond issued taken over by SG
completely. (as per FRP)
65,681.44
3 Status Quo operations
Bond issues with SG guarantee.
Bond issued not taken over by SG
(121,030.86)
4 Improved operations
Bond issues with SG guarantee.
Bond issued not taken over by SG
70,863.38
5
Improved operations along with
Smart Grid infrastructure
Bond issues with SG guarantee.
Bond issued taken over by SG
completely. (as per FRP)
2,552.64
20. Inference
• Long term positive NPV (improved operations) with decreasing STL shows signs of
business viability
• Better valuation can be achieved if the Liabilities are only guaranteed & not
replaced as equity on Discom books, keeping in view future acquisition possibilities
• ARR can be improved substantially due to reduction in ATC losses – with improved
Billing Efficiency & Collection Efficiency
• Model helps generate KPIs to achieve operational efficiency for State generation &
Distribution and reduce dependency on power bought from Centre or other state
utilities
• State Govt. can be made to realize that periodic revision of tariff is a necessity for
sustained operational performance and tariff increase could be allowed in by say
8th year
• Monitor performance of discom to set them for second phase of FRP structuring –
improved confidence with banks
• State subsidy can be reduced as operational performance improves, in fact even
made zero if periodic tariff hikes take place
• Billing efficiency and rise in cost of purchase of power has the most impact on NPV
• Cost Benefit analysis show that SMART GRIDs could serve as a long term
sustainable solution for Discom Business
21. References
• 1Infraline report on FRP status
• 2Ministry of Power Guidelines for FRP
• 3CERC approach paper for COC
• 4Business Standard Article June 2013
• India Infrastructure Report 2012-13
• PFC report 2012-2013
• Smart Grid Task Force publication