08.8 · Energy & utilities¶
Sector playbook. Oil and gas is a policy-and-price business (crude above $100 in 2026 is squeezing marketing companies while lifting upstream); power is in the middle of a transition in which renewables reached 54% of installed capacity while electricity demand contracted for the first time since the pandemic. Regulated returns, government pricing, PPAs and policy schemes (ALMM, PM-KUSUM — Kaveri's solar customer) define the economics more than competition does. As of September 2026.
Time: ~75 min · Prerequisites: 07.6 Real estate, infra, utilities & telecom, 07.3 Cyclicals
1. Oil & gas¶
| Segment | How it makes money | Key metrics | Policy lever | Companies (verify) |
|---|---|---|---|---|
| Upstream (exploration & production) | Sell crude at global prices (Brent-linked) and gas at government-administered or formula prices | Production (mmboe), realisation ($/bbl net of windfall tax), finding & development cost, reserves replacement | Windfall/special additional excise duty on crude (imposed 2022, varied since — verify current), gas pricing formula (APM linked to Indian crude basket with floor/ceiling) | ONGC, Oil India, Reliance (KG-D6), Cairn/Vedanta |
| Refining | Gross refining margin (GRM, $/bbl) = product prices − crude cost; complexity (ability to process heavy crude) | GRM vs Singapore benchmark; throughput; Nelson complexity; Russian crude discounts (2022–26) | Export duties; product pricing | Reliance (world-scale, high complexity), IOC, BPCL, HPCL, MRPL, Chennai Petroleum |
| Marketing (OMCs) | Retail petrol/diesel/LPG margins = retail price − refinery-gate price − costs; retail prices are de facto administered | Marketing margin per litre (diesel margins negative when crude spikes and pump prices are frozen — Business Standard, Sep-2026); LPG under-recoveries and compensation | Government control of pump prices; LPG subsidy compensation | IOC, BPCL, HPCL |
| City gas distribution | Regulated monopoly per geographical area (PNGRB) for a period; sell CNG/PNG at a margin over gas cost | Volumes (CNG, domestic/industrial PNG), gas cost mix (APM allocation vs spot LNG), EBITDA per scm, GA expansion | APM gas allocation cuts (2024–25 reduced priority allocation, raising costs — verify), excise/VAT on CNG | IGL, MGL, Gujarat Gas, Adani Total Gas |
| Gas transmission / LNG | Pipeline tariffs (PNGRB-regulated); LNG regasification tariffs | Volumes, tariff orders, utilisation | Unified tariff | GAIL, Petronet LNG, GSPL |
Drivers: crude and gas prices, the INR, government pricing decisions (the OMC "margin" is a policy variable in election years and crude spikes), refining spreads (global capacity, Russian crude), and the energy transition (EVs erode petrol/diesel volumes slowly; CNG substitutes). Valuation: upstream on EV/boe and DCF on a price deck net of windfall tax; refiners on mid-cycle GRM; OMCs on normalised marketing margins with a policy scenario (their profits swing from ₹1 lakh Cr combined in a good year to losses); CGD on volume growth DCF with gas-cost scenarios; PSU adjustments per 07.5.
2. Power¶
flowchart LR
G[Generation: thermal, hydro,<br/>nuclear, solar, wind] --> T[Transmission: PGCIL,<br/>private lines, InvITs]
T --> D[Distribution: state DISCOMs,<br/>private: Tata Power, Adani, Torrent]
D --> C[Consumers]
X[Power exchanges: IEX] -.->|short-term trades| G
R[Regulators: CERC, SERCs] -.-> G
R -.-> T
R -.-> D| Segment | Economics | Key metrics | Companies (verify) |
|---|---|---|---|
| Regulated thermal/hydro generation | RoE 15.5% on regulated equity (CERC 2024–29) + incentives; fuel cost passed through | Regulated equity base, PLF/availability, capex adding to base, DISCOM receivables | NTPC, NHPC, SJVN |
| Merchant / IPP thermal | Sell into exchanges or short-term PPAs at market prices | Merchant realisation, PLF, coal cost/linkage | Adani Power, JSW Energy, Tata Power (partly) |
| Renewables (solar, wind, hybrid, storage) | 25-year PPAs at bid tariffs (₹2.5–3.5/kWh solar); returns depend on capex/MW, PLF, financing cost; FDRE/storage tenders | Capacity (GW), pipeline, PLF, tariff, capex per MW, counterparty (SECI/NTPC/DISCOM), receivable days | Adani Green, NTPC Green, ReNew, JSW Energy, Tata Power Renewables, Suzlon/Inox Wind (equipment), Waaree/Premier (modules) |
| Transmission | RoE 15% regulated (CERC) or tariff-based competitive bidding (TBCB) with 35-year contracts | Capex pipeline, project wins, availability | PGCIL, Adani Energy Solutions, Sterlite/PowerGrid InvIT |
| Distribution | Regulated (state) with AT&C loss targets; private franchisees outperform | AT&C losses, tariff orders, regulatory assets (unrecovered costs) | Tata Power (Mumbai, Delhi, Odisha), Torrent Power, CESC |
| Exchanges | Transaction fees on traded volumes | Volumes, market share, regulation (market coupling) | IEX (07.2) |
The 2026 state of play: record renewable additions (51 GW in FY26; 288 GW RE capacity by June 2026, 54% of total — PV Tech) coincided with a demand contraction (weather, slower industrial demand — S&P Global), pushing down merchant prices and PLFs; thermal capex is nonetheless being added for peak/firm demand; storage (BESS) tenders are the new growth pocket; module manufacturing overshot (ALMM-protected but oversupplied). Kaveri's solar-pump customers (state agencies under PM-KUSUM) sit in this ecosystem — their payment behaviour is a DISCOM/state-finance question.
Drivers: demand growth (GDP, weather, electrification), fuel (coal availability and price, gas), tariffs and regulatory resets, DISCOM finances (late-payment surcharge rules improved discipline after 2022), renewable tender pipeline and bid tariffs, module/cell prices and ALMM/duty policy, transmission connectivity (the bottleneck for renewables), interest rates (project IRRs are rate-sensitive). Valuation: regulated businesses on regulated-equity × justified P/B (07.6 §3); renewables on project DCFs (equity IRR 12–16% target) and EV/MW; merchant on mid-cycle realisations; equipment makers on the capital-cycle lens (05.4).
3. KPIs to pull every quarter¶
| KPI | Source |
|---|---|
| Crude (Brent), Indian basket, INR; gas (Henry Hub, JKM, APM price) | PPAC, exchanges |
| GRMs (Singapore benchmark; company-reported) | Company; Reuters |
| OMC marketing margins per litre (petrol, diesel), LPG under-recovery | Broker estimates; PPAC |
| Power demand (CEA monthly), peak demand, PLF by fuel, exchange prices (IEX DAM) | CEA; IEX |
| Renewable additions (MNRE monthly), tender awards and tariffs (SECI), module prices | MNRE; Mercom |
| DISCOM dues to generators (PRAAPTI portal) | Government |
| Regulatory orders (CERC tariff, PNGRB tariffs, gas allocation) | Regulators |
4. Accounting quirks¶
Regulatory assets/deferred tariff income at utilities (revenue recognised on regulatory entitlement before cash); DISCOM receivables and late-payment surcharge income; capitalised borrowing costs during plant construction; decommissioning provisions; upstream: successful-efforts vs full-cost exploration accounting, depletion, abandonment provisions; OMCs: inventory gains/losses on crude price moves (strip from "core" GRM), government compensation receivables (LPG) booked when notified; CGD: gas cost mix and take-or-pay contracts; renewables: PPA accounting, viability-gap funding, ESOP-heavy new listings; PSU dividend policy.
5. Red flags¶
Merchant exposure sold as "contracted"; PPAs with weak DISCOMs and rising receivables; renewable capacity targets far beyond financing capacity; equipment makers booking orders from group projects (related-party demand); regulatory assets growing faster than revenue at distributors; OMCs' "core" earnings excluding inventory losses every quarter; upstream reserve write-downs; group-level leverage at private power conglomerates (the Adani case).
6. The 10-question sector checklist¶
- What is the price/tariff regime for each revenue line — regulated, contracted, merchant, administered?
- What policy decision most affects the next two years' profit (pump prices, windfall tax, gas allocation, tariff reset)?
- Counterparties: DISCOM/state exposure, receivable days, late-payment surcharge income?
- Capex pipeline: regulated (value-creating by construction) vs merchant/competitive (return depends on bids)?
- For renewables: tariff vs capex per MW vs PLF — what is the project equity IRR, and at what interest rate?
- Balance sheet at the group level, not just the listed entity?
- Commodity sensitivity: EBITDA per $10/bbl or per ₹1/kWh?
- Accounting: inventory gains, regulatory assets, capitalised interest — what is core?
- PSU considerations: dividend policy, OFS, cross-subsidy risk?
- Multiples vs regulated-equity justified P/B, EV/MW or EV/boe benchmarks — and what does the price assume about policy?
← Previous: 08.7 Metals, cement & chemicals · Module index · Next: 08.9 Real estate, infra & logistics →