How and Why to Value Coal-Based Power Plants in 2020
India is the third largest producer and consumer of electricity in the world 1. The total installed capacity in India has increased from 174 gigawatts (“GW”) in fiscal year (“FY”) 2011 to 370 GW in FY2020; a compounded annual growth rate (“CAGR”) of 9 percent 2. The growth in installed capacity has led to a reduction in the country’s overall power deficit from 8.8 percent in FY2011 to 0.5 percent in FY2020, and subsequently to a projected surplus of 2.7 percent in FY2021 3.
Source: https://powermin.nic.in/en/content/power-sector-glance-all-india; and Report on Short-term Power Market in India FY2019, p4.
Notes: Thermal power sources include coal, lignite, gas and diesel.
The country’s current installed capacity is dominated by coal-based power plants, accounting for about 55 percent (205 GW) of the total capacity 4. As the shift towards renewable energy gains momentum, the capacity share of coal-based power plants is expected to reduce but nonetheless remain significant at over 30 percent (or 267 GW) in FY2030 (as shown in Figure 2). After taking into account planned retirements of older power plants, India will require an additional 100 GW of new coal-based capacity in the next 10 years to meet its increasing demand 5, 6. Consequently, coal-based generation will remain an integral part of the Indian energy landscape.
Sources: https://powermin.nic.in/en/content/power-sector-glance-all-india; and CEA Optimal Generation Mix report, p14; and IEEFA Seriously Stressed and Stranded report, p3 and 7.
However, for investors, power generation is a risky business. The main sources of risk are the difficulties inherent in valuing power generation assets and the effects of government regulations and actions.
Power generation projects are complex undertakings and require significant time and effort to bring them into production. The process invariably begins with a substantial capital investment in equipment and infrastructure before commercial operations can commence. The construction process can be impacted by delays including on account of factors such as land acquisition and environmental clearances.
On top of that, projects may be prone to volatile commodity price cycles (such as those being seen in the commodities market today) and changes in supply and demand dynamics. Such risks will affect investors’ sensitivity to the sector’s risks. Being able to value such assets is critical to both investors and states, whether for the purposes of analyzing damages (that may arise from claims being pursued by domestic or foreign investors or for estimating operational losses); ascertaining the value of a power project or company in a transaction; demonstrating feasibility; or preparing capital budgets.
A valuation approach includes a detailed review of available market data, comparable transaction analysis and the construction of an income-based model whenever sufficiently reliable information exists to prepare one. In this article, we look at valuation approaches that might be considered to value power generation assets and projects.
1: IBEF Power Sector December 2019.pdf, p3
2: https://powermin.nic.in/en/content/power-sector-glance-all-india; and Report on Short-term Power Market in India FY2019, p4.
3: Load generation balance report FY2020, p10 and 33 (pdf); and Load generation balance report FY2012, p11 (pdf).
4: Includes 7 GW of lignite-based capacity. (Source: https://powermin.nic.in/en/content/power-sector-glance-all-india)
5: CEA Optimal Generation Mix report, p14; and IEEFA Seriously Stressed and Stranded report, pp3 and 7.
6: The estimate of 100 GW is as per the Central Electricity Authority projections prepared in or around February 2019. IEEFA forecasts, prepared in or around December 2019, new additions to be around 70 to 80 GW as of December 2019.