Higher return on equity (RoE) granted for power-sector units is proving to be a fixed-cost factor driving retail electricity tariffs up, according to analysts. The Central Electricity Regulatory Commission (CERC), guided by a policy objective to incentivise investments in the sector uses to provide RoE as high as 18% for gencos about two decades ago. This was in view of the fact that the cost of capital to set up the power infrastructure – generation, transmission and distribution – was very high, and companies needed high margins as risk premium on investments to protect themselves against any volatility in demand or supply.
The ROEs have since come down, but continue to jack up tariffs. Now that the prime lending rate and the 10 year G-Secs rates have fallen substantially, there is a pressing need to lower the RoE build into tariff determination, the analysts feel.
