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11-06-2020, 12:04 PM
Gencos provide electricity and will not be obselete. They can always expect to have customers.
A long time ago, gencos were allowed to monopolise the markets which they operate in, due to the large capital expenditure and economies of scale required for sustainable operation. And back then, capital was scarce, and hence, expensive. Of course, they are bounded by certain obligations and rules, such as regulated pricing, and ensuring high service levels. But generally, gencos of the past tended to be safe and stable money spinners. Ditto for telcos.
But for the past few decades, genco markets everywhere has been increasingly liberalised. Financing for new projects are getting cheaper, and if it is a renewable energy project, it is likely to enjoy some government subsidies. So you have more competition, and fiercer competition.
Energy is a commodity, and the business works just like other commodity producers/services; the largest-scale with the lowest per-unit cost wins. Since access of financing is no longer that big an issue, and the market is open to any able genco, it is difficult for any genco to have a strong and lasting advantage over the others.
When the times are good (positive future expectations, more market liberalisation, low financing cost), the energy industry will have more players and plants. But when the times are bad (overcapacity from overbuilding), it takes longer to work out the demand-supply imbalance because of the high sunk cost. And if you shut down some of your plants, it also means you're giving market share and revenue to the other gencos, while your idled assets are depreciating. In such a situation, the gencos can only wait for energy demand to catch-up, though some may be unable to hold out (like Tuaspring/Hyflux).
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1) I'm not familiar with the Indian energy market, so I'm not sure if SCI's Indian assets will be able to make more money in the future. But given the not so auspicious start of its very expensive coal plants, I don't see reason to be optimistic about high growth rates. Maybe some growth.
2) It is not necessary the case that coal is bad business, while renewables are good business. Though it is certainly the case that the latter is more popularly accepted than the former. Between these two, I'm not sure which produces better profits, though I suspect it is the old and dirty plants. SCI doesn't disclose on this.
And although there is greater pressure to adopt renewable energy sources, energy is a commodity and consumers generally do not care about its source, so long as they are not significantly affected by them (e.g. living next to a coal plant). Growing popular demand for renewables doesn't mean that consumers are willing to pay the higher prices that comes with it. In affluent Singapore you might have some significant sections of the population which are willing and able to afford slightly higher renewable prices. But this is unlikely in India.
The good thing about SCI's renewables portfolio is that it is immune to fossil fuel prices, since it doesn't use fossil fuel. This means they will likely do better during times of high fossil fuel prices.
But the increase in renewable sources will reduce demand for fossil fuels, which means cheaper fossil fuels. This makes fossil fuel plants cheaper to run, which increases their longevity (and possibly profitability). So building more renewable sources may actually lengthen the lifespan of old fossil fuel plants. Unless, of course, there is some intervention from regulators like imposing prohibitively expensive carbon taxes, or not permitting the renewal of leases.
3) Clearly, SCI's management intends to recycle capital, and will likely attempt to do so when the operating performance and market sentiment improves. But whether SCI can dispose its assets at good prices, and whether the capital is being recycled into more promising assets, is something that is very uncertain. And it is because it doesn't have a very good track record of doing so.
===
I think SCI's operating assets are likely to remain profitable, and may even recover in the years to come. If so, SCI at present prices can be somewhat considered cheap. Especially if a demerged SCI pays out higher dividends.
But, for reasons mentioned, I'm not optimistic that there will be a lot of growth.
Financing expenses eat up a significant portion of operating profits. So if this could be reduced, perhaps from a rights issue, SCI shareholder could enjoy higher profits and dividends.
A long time ago, gencos were allowed to monopolise the markets which they operate in, due to the large capital expenditure and economies of scale required for sustainable operation. And back then, capital was scarce, and hence, expensive. Of course, they are bounded by certain obligations and rules, such as regulated pricing, and ensuring high service levels. But generally, gencos of the past tended to be safe and stable money spinners. Ditto for telcos.
But for the past few decades, genco markets everywhere has been increasingly liberalised. Financing for new projects are getting cheaper, and if it is a renewable energy project, it is likely to enjoy some government subsidies. So you have more competition, and fiercer competition.
Energy is a commodity, and the business works just like other commodity producers/services; the largest-scale with the lowest per-unit cost wins. Since access of financing is no longer that big an issue, and the market is open to any able genco, it is difficult for any genco to have a strong and lasting advantage over the others.
When the times are good (positive future expectations, more market liberalisation, low financing cost), the energy industry will have more players and plants. But when the times are bad (overcapacity from overbuilding), it takes longer to work out the demand-supply imbalance because of the high sunk cost. And if you shut down some of your plants, it also means you're giving market share and revenue to the other gencos, while your idled assets are depreciating. In such a situation, the gencos can only wait for energy demand to catch-up, though some may be unable to hold out (like Tuaspring/Hyflux).
===
1) I'm not familiar with the Indian energy market, so I'm not sure if SCI's Indian assets will be able to make more money in the future. But given the not so auspicious start of its very expensive coal plants, I don't see reason to be optimistic about high growth rates. Maybe some growth.
2) It is not necessary the case that coal is bad business, while renewables are good business. Though it is certainly the case that the latter is more popularly accepted than the former. Between these two, I'm not sure which produces better profits, though I suspect it is the old and dirty plants. SCI doesn't disclose on this.
And although there is greater pressure to adopt renewable energy sources, energy is a commodity and consumers generally do not care about its source, so long as they are not significantly affected by them (e.g. living next to a coal plant). Growing popular demand for renewables doesn't mean that consumers are willing to pay the higher prices that comes with it. In affluent Singapore you might have some significant sections of the population which are willing and able to afford slightly higher renewable prices. But this is unlikely in India.
The good thing about SCI's renewables portfolio is that it is immune to fossil fuel prices, since it doesn't use fossil fuel. This means they will likely do better during times of high fossil fuel prices.
But the increase in renewable sources will reduce demand for fossil fuels, which means cheaper fossil fuels. This makes fossil fuel plants cheaper to run, which increases their longevity (and possibly profitability). So building more renewable sources may actually lengthen the lifespan of old fossil fuel plants. Unless, of course, there is some intervention from regulators like imposing prohibitively expensive carbon taxes, or not permitting the renewal of leases.
3) Clearly, SCI's management intends to recycle capital, and will likely attempt to do so when the operating performance and market sentiment improves. But whether SCI can dispose its assets at good prices, and whether the capital is being recycled into more promising assets, is something that is very uncertain. And it is because it doesn't have a very good track record of doing so.
===
I think SCI's operating assets are likely to remain profitable, and may even recover in the years to come. If so, SCI at present prices can be somewhat considered cheap. Especially if a demerged SCI pays out higher dividends.
But, for reasons mentioned, I'm not optimistic that there will be a lot of growth.
Financing expenses eat up a significant portion of operating profits. So if this could be reduced, perhaps from a rights issue, SCI shareholder could enjoy higher profits and dividends.