Spot price hike fails to charge up power firms

Industry says dormant demand and fluctuating prices should bring focus back to long-term purchase

Power developers had an impressive run last month, with generation showing a healthy growth of 6.5 per cent. With big states pushing the demand for power in the short-term market, the price shot up to Rs 9 a unit. While it might be a temporary phenomenon, sector executives are hoping that this will make states realise that long-term power agreements are a more reliable option. 

“The utilities cannot completely rely on just short-term power. Muted demand is coming to the fore, with energy access increasing and some green shoots in industrial demand. States, therefore, need to look at all sources. Power surplus is just a myth and so is complete reliance on the spot market. Long-term agreements need to be back in the states’ planning,” said a senior executive of a power generating firm.

Power sector executives are also pinning hopes on a price correction soon. “There are a number of reasons on the demand and supply side that led to this upturn. However, largely on the supply side, most of the developers are unable to recover the fundamental cost. So, the high spot price reflects the pending cost that the developer was supposed to recover in the past three years,” said Vivek Sharma, senior director, (infrastructure advisory) at CRISIL.

Experts say large states, such as Uttar Pradesh, Karnataka, Rajasthan and Telangana, have been pushing power demand in the past three months. The demand increase in these states has been close to 20 per cent over the last year. In the latest Index of Industrial Production numbers, electricity sector showed a growth rate of 6.5 per cent. 

Sharma said the loss in their books and the pressure of recovery would push the developers to recover cost whenever a demand-supply gap situation arose. It’s the distribution companies (discoms) that needed to take a fresh look at their power procurement strategy than the knee-jerk reaction of depending on the short-term market, Sharma said, adding  states needed to have long- and medium-term planning in their power procurement.

In its latest paper, rating agency Icra said the spike in spot tariff was likely to be temporary, given the still moderate demand. Most of the power developers are also calling the price increase as a blip. “The gap between demand and supply is increasing. Coal supply is on the margins anyway. So if demand does not pick up now, the generation increase will not be sustainable,” said A K Khurana, director general, Association of Power Producers, the representative body of private power developers. 

The overall plant load factor (PLF) in the country also improved to 58 per cent in August 2017, up from 51.9 per cent in August 2016. 

Despite the increase, the PLF has still not bounced back to the 2012 levels when it was close to 75 per cent. PLFs have been declining since then, with minor corrections. “Power generation would not pick up unless there is revival in the industrial power demand. The industrial production needs to be in the range of 5-6 per cent to support a sustainable growth in power generation,” said Debashish Mishra, partner, Deloitte Touche Tohmatsu India LLP.