Sabyasachi Majumdar, Head, Power Sector Ratings, ICRA
The telecom sector is a major user of diesel, second only to the transport sector. The industry utilises diesel primarily to power its towers and other equipment. Increasing diesel usage has resulted in higher energy costs for the sector.
The price of crude oil constitutes a substantial part of diesel costs. Currently, India imports over 85 per cent of the crude oil processed by domestic refineries. International oil prices and refinery gate diesel prices have been increasing continuously. Also, higher state taxes and duties are contributing to the rise in diesel prices.
Meanwhile, the telecom sector?s fuel consumption is likely to increase as more towers come up in rural areas. The growth in base transceiver station tenancy is also contributing to increased demand for diesel in the sector. The industry is expected to consume 3.42 billion litres of diesel in 2012, 4.8 billion litres in 2015 and 6.3 billion litres in 2020.
In the near future, it is likely that the government will move away from a subsidy regime and thus pave the way for diesel to be sold at market prices. International oil prices will play a decisive role in determining domestic diesel pricing. It is, therefore, likely that diesel prices will continue on an upward trajectory. By 2015, diesel is expected to cost about Rs 55 per litre and Rs 60 per litre by 2020.
Currently, the tariff structure in the country is governed by policies like the Electricity Act, 2003, the National Electricity Policy, 2005 and the National Tariff Policy, 2006. The objective of the National Tariff Policy is to create a competitive market to ensure commercial viability; availability of power at affordable prices; and promote transparency and consistency. As per the policy, tariffs are to be determined by the state electricity regulatory commissions. Such tariffs will progressively reflect prudent costs of power supply. The differentiation in pricing will be only on the basis of consumer load factor, voltage and total consumption of electricity. The policy also envisions incentivising efficiency gains by utilities through a multi-year tariff framework, which focuses on mitigating external risks.
At present, cross-subsidisation continues to be the biggest challenge faced by the power sector. Cross-subsidisation is defined as the ratio of commercial tariff to average tariff. Despite some improvements over the past few years, non-domestic and industrial consumers continue to cross-subsidise other categories.
Also, power purchase costs and losses account for the bulk of the cost of supply for the utilities. As of now, the utilities? total loss before subsidy is estimated to be Rs 800 billion, while it stands at about Rs 400 billion post-subsidy. Following the expected tariff hikes, these losses are likely to come down in 2013-14. At present, the utilities? total borrowings for funding their losses are around Rs 2 trillion. If banks accept the equity infusion-cum-loan restructuring proposal, it would reduce the pressure on utilities/tariffs.
Since 2008, there has been a marked growth in procurement costs. However, the increase plateaued in 2011-12, with some states showing a decline in procurement costs. Volatile fuel costs, especially those of coal, continue to be a major concern for the power sector.
Coal-based power generation is highly sensitive to fuel costs. Lately, international coal prices have witnessed some softening, which has been attributed to shale gas partly replacing coal as a fuel source in the US and the impact of the slowdown in the country?s economy on gas offtake. However, it remains to be seen how long this development will last.
The demand from upcoming power plants will substantially outstrip the incremental domestic coal output in the medium term, resulting in a higher dependence on coal imports. Also, proposed profit sharing in the mining sector and other inflationary pressures could drive up domestic coal costs further. There could be an additional impact of Re 0.40-Re 0.50 on power generation costs on account of increasing coal prices. The outlook for gas availability and pricing continues to be uncertain.
Meanwhile, the near-term outlook for power tariffs does not look favourable. Commercial tariffs are unlikely to come down. However, improved performance on tariff filings and issuance of tariff orders is expected.
The upward pressure on fuel prices and capital costs will drive up power procurement costs. So far, loss reduction by utilities has been slow; however, the success of the Restructured Accelerated Power Development and Reforms Programme will be critical in this regard. Slippages in generation capacity and fuel availability will result in a continued deficit for utilities in the medium term. Further, amortisation of regulatory assets in most states would contribute to tariff pressures.
Going forward, debt restructuring, loss reduction and improvement in domestic coal supplies are critical for managing power costs.
