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December 29, 2017

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After losing 27pc this year, power sector braces for more shocks in 2018

KARACHI: With the operations of scores of inefficient thermal power plants hanging in balance, country’s listed power sector eroded by an alarming 27 percent in 2017, analysts said fearing several generators would go out of business as a capacity addition of over 14,000 megawatts (MW) was due by 2020.

Adnan Sami at Topline Securities said despite being considered a safe bet (dollar hedge and high-yielding dividends), power sector saw its value erode by 27 percent in 2017 versus 10 percent return in 2016. “The sector has been plagued with overdue receivables which have hampered few listed power producers’ ability to pay dividends,” Sami said adding while more recently, government’s push to eliminate furnace oil in lieu of cheaper fuels has raised concerns on their future profitability as most of the producers were furnace oil based.

Meanwhile, country’s electricity generation on residual furnace oil (RFO) plants declined by 46.9 percent despite a surge of 2.8 percent in the overall electricity generation in November 2017.

Arslan Soomro, advisor at Tundra Fonder, said the struggling power companies were left with no other option than either to convert their plants to regasified liquefied natural gas (RLNG) or shut down and thus be eligible for guaranteed capacity payments only according to their power purchase agreement (PPA).

“Inefficient players such as Lalpir and Pakgen are actually better off not generating electricity, as their profits drop if they generate and if oil prices are higher,” Soomro said.

The closure of power plants will also negatively impact the oil marketing giant due to the possibility of further delays in the receipt of outstanding receivables from the power sector, demurrages on RFO shipments that the company cannot unload and medium-term higher exposure to international oil price due to high inventory levels.

Refineries, which supply furnace oil to power plants, have also come under pressure as the sector shed 32 percent in 2017 against a 65 percent return in 2016. Though refineries incurred major capital expenditure during 2016-17 to produce Euro-II grade low sulfur diesel, recently their output has been curtailed as the government shuttered furnace oil based power generation. “This led to serious problems, where storage tanks were filled to the brim with furnace oil as power plants had ceased operations,” an analyst at Topline Securities said.

A broker said there was no noticeable movement in the market as yet, however mergers and acquisitions could not be ruled out in the near future.

A top official at Pakistan Electric Power Company (PEPCO) said with the advent of state-of-the-art plants and growth in renewable energy generation, old plants could not make to the dispatch priority list.

“Old and inefficient plants would automatically be phased out,” the official said. It may be mentioned here that Kot Addu Power (KAPCO) witnessed off-loading lately due to uncertainty regarding renewal of its PPA.

Syavash Pahore, a research analyst at Elixir Securities, said this posed a significant downside risk for Nishat Power (NPL) and Nishat Chunian Power (NCPL) as both plants had benefited from fuel, operations, and maintenance related savings in the past.

However, Ovais Ahsan, one of Pahore’s colleagues, in a research report noted that plants that are converted to LNG or coal would move up in the merit order leading to higher utilisation levels.

Tundra Foner’s Arslan Soomro, chimed in that it was a wise move by the government to not to purchase electricity from furnace oil based generators and more reforms in the energy sector would follow.

“The government would experiment and only be able to learn from the impact of unforeseen - in this case local refineries being shut - once they implement reforms,” Soomro added.

Soomro predicted that down the line old power plants would have to resort to more efficient fuel (RLNG) but that would depend on lengthy discussions on the incentives government provides.

Analyst Osama Rizvi stressed to unlock the immense potential of solar and wind resources.

“Our topography will compliment these efforts and without renewable, we won't be competitive in the longer run,” Rizvi added.

About the outlook, a report by Arif Habib Limited (AHL) suggests, going forward, power generation sector was expected to record a robust growth as it is on its way to a low cost era, while power generation was likely to surge by 10 percent in FY19 due to capacity additions in the system.

“As of November 2017, RLNG and coal had 9.7 percent and 10.7 percent share in the energy mix respectively. However, the share of RFO has declined to 7.2 percent from 19.7 percent last year,” the report said.

It added that by the end of June 2019, the share of coal was expected to increase to 11 percent, while the share of RLNG to 14 percent due to induction of new power plants in the system.

“The IPPs are offering a lucrative dividend yield of 11 percent and in addition to this, the return of IPPs is guaranteed and hedged against US dollar,” the AHL report said.

It may be mentioned here that a sum of $33.7 billion was allocated for the power sector under China-Pakistan Economic Corridor (CPEC). The two coal-based power plants i.e. Sahiwal coal plant and Port Qasim plant have already been established, easing demand and leaving inefficient RFO plants unviable.

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