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AKD Securities Limited Equity Research – Daily Report (September 20, 2022)

Karachi, September 20, 2022 (PPI-OT): Pakistan Power: Generation sustains its level in August

· CPPA-G released its Energy Purchase Data for the month of August. Power generation has remained flat in August to clock in at 14,053GWh, while decreasing by 13%YoY from the 16,078GWh recorded in Aug’21.

· The significant increases in power generation have been seen from Coal and RFO plants, with generation up 20%MoM and 16%MoM. Generation from Gas and RLNG has decreased by 10%/17%MoM as the market operator chose to give preference to other thermal sources amid the gas shortage in the country.

· Average cost of generation for the month has dropped down by 6%MoM to reach PkR10.1/kWh owing to the higher weight of Hydel in the generation mix along with reduced contribution from the costly RLNG. Moving forward, we can expect the cost of generation to dip slightly in September.

· HUBC has seen a decline in generation, with 15% less power purchased compared to July and down 38%YoY. KAPCO has also experienced a dip in utilization, decreasing to 15% vs. 30% in July as the usage of both gas and RLNG decreased in August, leading to a 49% decrease in generation.

· As winters approach, global prices of thermal fuels are likely to skyrocket, as Europe scrambles to generate power from other thermal sources after the shutdown of the Nord-1 pipeline by Russia. Coal, Oil and RLNG prices are expected to surge, and it remains to be seen how the country and its market operator manage the generation mix, as Hydel generation evaporates.

Power Generation data for Aug’22:

CPPA-G released its Energy Purchase Data for August. Power generation has remained flat in August to clock in at 14,053GWh, while decreasing by 13%YoY from the 16,078GWh recorded in Aug’21. Shortfall in the demand-supply gap in August was estimated to be ~5900MW, slightly decreasing than last month as demand lessens, while worsening from the same period last year. We expect generation in September to decrease as demand declines after the peak in the summer, in-line with its historical pattern.

Sources of Generation:

The significant increases in power generation have been seen from Coal and RFO plants, with generation up 20%MoM and 16%MoM respectively owing to low- base effects, as generation from both significantly dipped last month. Hydel generation has also likely reached its peak in August with 5,354GWh generated, up by 8%MoM but down 4% YoY. Generation from Gas and RLNG has decreased by 10%/17%MoM as the market operator chose to give preference to other thermal sources amid the gas shortage in the country.

Cost of generation:

Average cost of generation for the month has dropped down by 6%MoM to reach PkR10.1/kWh owing to the higher weight of Hydel in the generation mix along with reduced contribution from the costly RLNG. The largest contributors to the mix in August are Hydel, Coal, Nuclear, RLNG, Gas and RFO, contributing 38%/15%/13%/12%/9%/7% to the mix. Cost of generation from Coal has increased by 2%MoM to PkR20.5/kWh, while Gas saw a 5% increase in cost to PkR10.5/kWh. The significant decrease was witnessed by RLNG, with its cost of generation decreasing by 13%MoM to clock in at PkR24.7/kWh. Despite this, it remains the second costliest fuel source, behind the PkR35.6/kWh of Furnace Oil. Moving forward, we can expect the cost of generation to dip slightly in September as hydel sustains its generation levels while total generation decreases, hence increasing its weight in the mix.

Performance of IPPs:

HUBC has seen a dip in generation, with 15% less power purchased com- pared to July and down 38%YoY. While the Hub and Narowal plant have seen increased genera- tion, CPHGC has seen a 30%MoM decrease in generation owing to the IPP being cash-strapped and hence unable to import sufficient coal. KAPCO has also experienced a dip in utilization, de- creasing to 15% vs. 30% in July as the usage of both gas and RLNG decreased in August, leading to a 49% decrease in generation. NCPL’s power generation rose by 26%MoM, while NPL has sustained its high utilization with 70% posted in August, keeping generation flat.

Investment Perspective:

Looking ahead, KAPCO has recently announced a healthy dividend of PkR4/sh for the year end, taking total dividend to PkR8/sh. Furthermore, its generation license has been renewed by NEPRA till 2024, which is likely to pave way for a PPA extension of the same length. HUBC can be expected to record an increase in CPHGC’s generation, as the GoP has vowed to resolve the cash crisis for CPEC IPPs. The IPP can also announce a special cash dividend when the payout is received, although we advise investors to remain cautious in this regard, with HUBC not announcing a dividend for the year-end owing to concerns over cash management. As winters approach, global prices of thermal fuels are likely to skyrocket, as Europe scrambles to generate power from other thermal sources after the shutdown of the Nord Stream-1 pipeline by Russia. Coal, Oil and RLNG prices are expected to surge, and it remains to be seen how the country and its market operator manage the generation mix, as Hydel generation evaporates.

akd-securities-limited-equity-research-daily-report-september-20-2022

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