Merchant power prices may stabilise at Rs 4/unit by 2014

After a free fall in the first three quarters of the current financial year, merchant power prices may stabilise in the next two to three years.

According to estimates of stock broking firm Edelweiss, merchant power prices could be at around Rs 4 a unit by 2013-14. In 2010, merchant power prices had fallen to Rs 3 per unit, significantly lower than the peak of Rs 6.8 per unit in 2009.

Shortage in domestic coal could be one reason for the expected stability as it would increase the average cost of power generation. “It is expected that either plant load factors of new units will be sub-optimal or there will be 20-30 per cent blending of imported coal, raising fuel costs and thus power costs,” says the report by Edelweiss.

Increased usage of expensive imported coal would increase power purchase agreement prices by 2013-14 to Rs 3.8-Rs 4.3 per unit.

According to price of long-term power increases, it would naturally bring up the prices of merchant power as well.

“State electricity boards (SEBs) expect merchant rates to stabilise at Rs 3.8-4 per unit over the next 2-3 years, with a premium or discount, depending on peak shortages, seasonal and climatic patterns,” the firm estimates.

In the short-term, however, there would be pressure on merchant power rates, said the firm, which interviewed power secretaries and top officials of five state electricity boards in India.

The demand for power is currently low due to the onset of winter. An exceptionally good and prolonged monsoon too had reduced peak power demand for power in September-October season, bringing down merchant rates in 2010-11. “With weakening financial health of SEBs, there is likely to be more controlled power purchases. We reduced our assumption of merchant prices by 50 paise, to Rs 4.50 in 2010-11,” the report says.

SEBs are the biggest buyers of merchant power, but have reduced their exposure, due to their weakening financial condition, hitting demand and prices. States have even resorted to load shedding instead of buying power available in the market.

“Some states are resorting to fresh loans to fund entire losses. The losses are not only due to high AT&C losses, but also owing to the widening gap between revenue and costs,” the report says.

As more power capacity is being added across the country, states are expecting to source more power through long-term power purchase agreements, reducing their dependence of merchant power. “Most states were confident that capacity additions, even after assuming one-year delays, will largely reduce energy deficit and in some case result in surplus; by 2014-15,” says Edelweiss.