From coal-based to a renewable energy-based NTPC in ten years

But the company will have to do a financial Houdini act meanwhile to make the markets keep faith in its long term story

In August 2021, the coal-based generation capacity of NTPC, India’s largest power company, was 47.4 Gw. In just above ten years, the company expects to generate 60 Gw of renewable power from the current 1.1 Gw. If successful, it shall be one of the largest pivots from fossil fuel to renewables for any energy company in the world, in such a short time.  

To get a better sense of the scale of the switch, between now and 2032, NTPC has plans to commission another 12 Gw of coal power. It might add another 4 Gw through the inorganic route. Since thermal plants have a lead time of 5-7 years, it is unlikely that these numbers will swell much more.

At the same time however, the company’s renewable arm NTPC REL, which has just 1.1 Gw of installed capacity shall add an entire company of the size of the current NTPC to its portfolio. NTPC has a current installed capacity of 66 Gw from fossil and renewable.

One is entitled to look goggle-eyed at whether the economy can absorb such a rate of growth, but given the pace at which India’s expected demand for power is galloping ahead, it just might come true. India’s installed capacity for power is expected to more than double from the current 382 Gw to 817 Gw by 2030. NTPC has to play a critical role if this leapfrog has to happen. One of NTPC plans is to list NTPC REL for which it has already appointed merchant bankers. There are not too many examples among India's state owned units which have shown the gumption to list a subsidiary. NTPC REL will need massive capital and the mother company can hardly provide those. 

But meanwhile, company chairman Gurdeep Singh will have to perform a financial Houdini act. NTPC needs to attract investors like flies, but its present numbers do not seem primed to do that. A big reason for that is the level of debt it has already run up. As of June 2021, the company’s debt equity ratio is already 1.53. It is not high compared with its smaller peers like Tata Power at 1.6, or Adani Transmission at 2.7, but given the fund raising NTPC needs to step into, investors could be concerned. There concerns remain though the interest coverage ratio, broadly a measure of how well a company can pay off its lenders, is currently at a very healthy 2.3. Essentially it is a score card of a reasonably meritorious student in the class of power companies. The performance has kept the institutional investors reasonably interested with most brokerage houses painting it the shares as “attractive”. The largest of these investors for NTPC is LIC with a holding of 10.99 per cent. Most of India’s leading public sector shares get the same LIC patronage. Yet if the LIC percentage is diluted, the share of institutional investors in the NTPC currently at 46.14 per cent, would dip, diluting its label of an attractive stock.

The challenge NTPC is setting up for itself is something like this. At present, almost all its revenue comes from sale of coal fired power. It has been able to retain the average price of the electricity it sells at a healthy Rs 3.73 per KWh as of the first quarter of FY22. Of this, fixed charges account for 44 per cent. As the company pivots to RE, it shall be either reducing or keeping flat its earnings from additional coal capacity even as its fixed charges would intially rise The company has already decommissioned about 2.4 GW since 2017. These are plants which have run at least 25 years and cannot be retrofitted to satisfy the new emission norms.  Another similar tranche should be out of its portfolio in this decade. At the same time the appetite of the power distribution companies to continue with long term power purchase agreements with generation companies like NTPC is declining. Those agreements of usually 25 years gave NTPC investors long-term visibility to future revenue stability. As the distribution companies source more power from the spot markets the average price of power from the company will dip. The volumes at IEX, which was 6 per cent of the total power sold in the country, is expected to reach 11 per cent by next year. 

An NTPC spokesperson expressed confidence that the existing capacity shall continue as regulated business even though the RE business shall operate under the robust tariff based competitive bidding. The catch is that price realisation from each new solar project is dipping fast. At the 325 Mw solar projects at Shajapur Solar Park in Madhya Pradesh which NTPC REL won for two tenders of 105 Mw and 220 Mw the price quoted was for Rs 2.35 and Rs 2.33 per kWh, respectively. These prices are unlikely to improve for the massive 4.75 Gw solar park project it is developing in the Rann of Kutch. The company has got an in-principle approval from the ministry of new and renewable energy for the same. NTPC REL plans to develop another 10 GW of Kutch like solar parks in other places; it has signed MoU with ONGC to develop offshore wind projects and at the same time will also finance some of India’s ambition to become a significant producer of green hydrogen.  

So the conundrum is that as the coal portfolio of the company runs down, its revenues could also grow slower. The year-on-year growth of net sales for the company in FY21 is 1.89 per cent against 9.15 per cent realised for FY20. The numbers for the June quarter or for the financial year FY21 have of course been skewed by Covid, so they may not offer a fair comparison. FY22 could see the company in a far better operating zone. The operating profit margin for the company has already improved to 30.46 in FY21 from 28.81 in FY20. 

These numbers shall have to shine considerably brighter for NTPC if the public issue of its subsidiary NTPC REL has to fly. To make the string of massive investments in its solar power generation capacity, the benefits from which shall start to flow in only from the decade thereafter, the company has to make the markets believe in the long-term story.