Ambit Capital Forecasts Thermal Power Resurgence
India's thermal power tendering cycle is poised for a significant revival, with Section 63 of the Electricity Act once again taking center stage, according to a recent analysis by Ambit Capital. The financial services firm notes that the updated framework for thermal power development presents considerably lower risks for developers compared to previous cycles.
Key factors contributing to this reduced risk profile include the implementation of SHAKTI-linked coal at CIL-notified prices and the Design, Build, Finance, Own, Operate (DBFOO) model. These mechanisms effectively mitigate fuel-price volatility, a major concern in past projects. Ambit projects that new tenders, featuring capacity charges ranging from Rs 3.5-4 per kilowatt-hour (kWh), could potentially yield an attractive 20 percent equity internal rate of return (IRR) for developers.
Historical Context and Current Opportunities
Section 63 was pivotal in the thermal power boom between FY07-11, accounting for approximately 56.5 gigawatts (GW) or nearly 60 percent of all thermal tendering. However, many projects from this period later faced severe stress due to a combination of power surplus and the deallocation of coal blocks, leading to a substantial slowdown in tendering activity from FY12-22, when Section 62 dominated.
Today, Ambit identifies a robust pipeline of approximately 50 GW, with 21-22 GW located in states historically more inclined towards Section 63-oriented projects. The firm anticipates around 15 GW of new tenders this year from states like Uttar Pradesh, Gujarat, West Bengal, and Uttarakhand. States such as Andhra Pradesh, Assam, Haryana, Maharashtra, and Madhya Pradesh have also shown a strong inclination towards the Section 63 model, with Bihar and West Bengal recently adopting it.
Key Risks: The Rise of Battery Energy Storage Systems
Despite the optimistic outlook for thermal power, Ambit Capital identifies storage and Battery Energy Storage Systems (BESS) as a critical emerging risk. The firm points to falling sodium-ion battery prices, which could trigger wider adoption of these technologies. This shift could weaken demand for existing lithium iron phosphate (LFP) batteries and drive both price curves lower across the storage market.
Ambit's analysis suggests a scenario where India could face thermal oversupply if non-solar peak demand grows at 6 percent annually to 340 GW by FY32, while thermal additions reach 47 GW and BESS capacity exceeds 47 GW/188 GWh by the same year. This delicate balance underscores the need for careful planning in the evolving energy landscape.
Analyst Ratings and Risks for Utility Stocks
Ambit Capital has issued specific ratings, target prices, and identified key risks for several prominent Indian utility stocks:
- Tata Power: Buy | Target Price: Rs 420. Risks: Higher coal prices, other investment opportunities.
- NTPC: Buy | Target Price: Rs 420. Risks: Lower industry demand growth, moderation in BESS prices, delays in project commissioning.
- Suzlon Energy Ltd: Buy | Target Price: Rs 59. Risks: Implementation of DSM regulations impacting wind Independent Power Producers (IPPs), continued slowdown in power demand leading to lower wind capacity additions.
- Torrent Power: Sell | Target Price: Rs 1,270. Risks: Potential upside to gas earnings if LNG gas prices fall, multiple new DISCOM opportunities.
- Power Grid: Sell | Target Price: Rs 280. Risks: Over Rs 2 lakh crore capitalisation over the next 5 years, increased discipline in TBCB (Tariff Based Competitive Bidding) bids.
- NTPC Green Energy: Sell | Target Price: Rs 85. Risks: Returns improving in Renewable Energy (RE) as supply/demand tightens, lower interest rates, new project tariffs reflecting lower debt costs.
- JSW Energy: Sell | Target Price: Rs 525. Risks: Less than or equal to 5 percent demand growth, higher curtailments, higher interest rates.
- Premier Energies Ltd: Sell | Target Price: Rs 970. Risks: Lower than or equal to 5 percent power demand growth, faster-than-expected ramp-up of new cell lines by peers.
- Emmvee Photovoltaic Power: Sell | Target Price: Rs 380. Risks: Lower-than-expected EBITDA margin due to heightened competition, new cell lines entering the market in 18-24 months, low power demand growth implying lower requirement for solar modules.
- Saatvik Green Energy: Sell | Target Price: Rs 380. Risks: Lower-than-expected EBITDA margins due to heightened competition and new cell lines in 18-24 months, low power demand growth implying lower requirement for solar modules.