Distress in power market visible in low spot prices

Price falls in spot market as developers try to recover cost

The increasing risk in long-term power sale is pushing generating companies to sell power in the spot market at half the tariff they quote in bidding for power purchase agreements (PPAs). Instead of a complete shutdown due to lack of demand from states, power developers are trying to recover at least the variable cost by selling in the open market.

While private players and some states have been active in the spot market, NTPC has also started selling un-requisitioned surplus power at the exchanges. NHPC, Neyveli Lignite and more states would follow suit soon, said executives.

While the tariff quoted in PPAs has touched Rs 3.9-5.5 a unit, the spot price has gone down to Rs 2.16 a unit during the same period. Day-ahead spot market is three per cent of the total power market, but it sets the benchmark for medium-term and long-term power rates.

The spot price is the same as the variable cost quoted by the power producers in their bids for long-term PPAs, indicating these power developers are trying to recover their variable cost.

The tariff being quoted in bidding has two components — fuel or variable cost and fixed capital cost inclusive of transmission charges and other variables. The range of variable cost was Rs 0.89 a unit to Rs 1.41 a unit, while the fixed cost component ranged between Rs 2.86 and Rs 4.09 a unit.

According to market calculations, a complete shutdown by any plant leads to around Rs 2 a unit of continuous loss for it. “Selling in the spot market keeps the flow of revenues and losses come down to only 10 paise per unit. These plants sell in the spot market to meet their fuel cost, keep plants running and, once in a while, make profits as well,” said a senior power sector expert.

According to power company executives, disparity in the bid rates and spot prices is reflective of the demand stress these plants are facing. In recent times, no state except Uttar Pradesh and Andhra Pradesh in 2015 and Kerala in 2013, has offered long-term PPAs.

In the bidding held in Uttar Pradesh on Monday, the rates received were in range of Rs 3.9 to Rs 5.5 a unit. In March 2013, Kerala called for bids for 400 megawatt (Mw) in two tranches and received bids in the range of Rs 3.6-7.29 a unit. Thereafter, Andhra Pradesh issued tenders to purchase 2,400 Mw of power. It received bids in the range of Rs 4.27 a unit to Rs 4.98 a unit.

Rajasthan and Tamil Nadu, too, had received low bids of Rs 5.41 and Rs 5.66 a unit.

Bidding in all these states were done on the revised case-1 bidding document, which allows annual revision of tariff over the period of PPA (25 years). According to power sector experts, the bids are competitive if seen in the light of new bidding norms. “The split between the fuel cost and the fixed cost reflects that power developers are factoring in uncertainties of cost pass-through, take and pay risk on the fixed cost,” said a power sector expert.

“Given the demand-supply mismatch, a strategic approach to buy spot power during restructuring of discoms would save the states around Rs 1-2 a unit, manage their cash flows better, reduce transmission losses and serve the consumer better,” said a senior executive.