Risks in Regulated Thermal Power Plants – Lower Regulated Return on Equity
Central Electricity Regulatory Commission (CERC) reduced the return on equity (RoE) allowed in the tariff to 14% from the previous 16% while finalising the regulations for the renewable energy for the control period FY18-FY20. Earlier regulations allowed 20% pre-tax RoE for the first 10 years and 24% from the 11th year. This translated into a post-tax RoE of nearly 16%, as developers used to avail 80IA benefits.
The reduction in RoE by CERC was driven by a lower risk-free rate while arriving at the cost of equity as per the capital asset pricing model, due to a decline in interest rates. While arriving at the 14% cost of equity, the regulator considered a risk-free rate of 7% and a risk premium of 7%.
According to India Ratings and Research (Ind-Ra), if similar basis were to be incorporated for thermal power plants, the RoE allowed for such plants would decline for the tariff block FY20-FY24. In the past, the regulator kept a higher RoE for renewable power projects at 16% than that allowed for thermal power projects at 15.5% to attract investors.