Discoms likely to consider PPAs as short-term power rates rise

The price of one unit of power sold in the spot market has jumped over 50 per cent over a year ago. This implies an increase in demand and input cost. It may also be an early indicator for state distribution companies (discoms) to consider long-term options for power procurement.

As the cost of short-term power rises, it is likely that state discoms would look at longer tenure for power purchase agreements (PPAs).

“We may see a change in the trend (where long-term PPAs were missing so far) now that merchant power prices are also going up and because the ministry initiatives are also to centralise procurement. Whether the revival is medium- or long-term needs to be seen,” said Vivek Sharma, senior director, CRISIL Infrastructure Advisory.

“The exchange prices have moved up and the bilateral agreement prices are also going up for the last one year. We expect this trend to continue, which in turn will trigger a PPA,” he said.

According to the data available with the Indian Energy Exchange, a platform to trade energy in the spot market, average monthly price for one unit of power for April 2018 is at Rs 4.15 against an average monthly price of Rs 2.70 per unit in the year-ago period, up 53 per cent.
 

Rising coal prices also pose a challenge for state distribution companies.

“In most of the short-term (three-six months) contracts where bids were called for, the lowest bid was above Rs 4 per unit and the average price was at Rs 7 per unit,” said a top executive at a private power producer. The executive attributed the higher bid price to the rise in coal prices.

Kameswara Rao of PWC India said this could push discoms to consider other options.

“State utilities are not rushing into new long-term PPAs yet but are considering options to meet the spurt in demand. In most cases, while it is state-specific, most have the possibility to extend or draw more from existing arrangements. There is a growing realisation that the actual surplus capacity (adjusted for old or unavailable assets) is much lower and a modest demand spike or supply shortage can cause prices to shoot up. So, it may not be long before discoms start testing the market to sign long-term PPAs,” he said.

In February 2018, all-India peak demand for electricity increased 9.8 per cent year-on-year (y-o-y) to 158.3 gigawatt (Gw). The peak supply improved 9.3 per cent y-o-y to 157.2 Gw — a deficit of about 1.04 Gw during the month, an India Ratings report said.

CRISIL’s Sharma sees medium-term agreements of five-seven years as a possibility in the next three months. “Long-term pacts (10 years and above) is not a reality now. Medium-term agreements (three, five or seven years) may materialise in the next quarter itself. Work is in progress to procure 2,500-Mw capacity under a medium-term contract. We have not seen a medium-term contract of this kind in recent times,” he added.