Ind-Ra: Merchant Power Market to Burgeon Over FY18-FY20; Discoms to Reap Benefits

The short-term power market is up for an eventful journey in FY18-FY20, says India Ratings and Research (Ind-Ra). However, the market is inhibited by impediments such as transmission constraints, opaque processes on open access within most states and steep cross-subsidy charges. A power supply-demand mismatch and a hiatus in long-term power purchase by states provide immense opportunities to the merchant market.

Ind-Ra expects utilities to increase the share of short-term purchases in the next three years gradually. Against a backdrop of diminishing power rates, discoms have unfettered access to the economical merchant market, apart from existing power purchase contracts. With spot prices hitting rock-bottom levels, discoms can reap benefits in the form of cost savings. However, capacity charges payable on long-term power contracts could be a drag on state utilities.

The Ind-Ra-rated portfolio of projects witnessed a depressed plant load factor level in FY17, though cash flows of such projects were reasonably insulated from volatility due to capacity charges payments. Developers with power purchase agreements (PPAs) that find spot market prices lucrative to enhance their returns could fiercely compete with other marginal players, if power is not scheduled by counterparties. Meanwhile, power producers that have not entered into PPAs will tap the merchant market, only when cost of generation (including fixed and variable cost) is lower than merchant rates.

Cross-subsidy charges range between 9% and 44% across states, indicating the extent of high charges paid by industries. Had these charges been lower/nominal, industries would have tapped low-cost power, adding strength to the Make in India initiative and delivering a globally competitive product. Short-term open access, touted as a boon to the power sector, is marred by exorbitant cross-subsidy and other transmission charges levied to offset the revenue foregone by state utilities due to switchover by customers. However, utilities exploit these charges as a tool to prevent losing high-value industries from their portfolio to the short-term market. Although open access is being granted to generators to evacuate excess power in many states, only a handful of states permit open access to bulk consumers.

Under general network access, access to transmission systems will be location agnostic vis-vis the current open access regime that requires the declaration of the target region of power supply. The GNA regime is likely to enable sufficient transmission capacity to address dynamic power flow patterns, once transmission planning is aligned to peak demand of all regions. The current system, based on declaration from generators on the target region of supply, has resulted in the building of unnecessary or inadequate infrastructure across various regions.

The power market would benefit from recent regulations focused on improvements in grid code and grid operations, as well as from the introduction of forecasting and scheduling for renewable power. The simplification of the retail tariff and the introduction of the National Open Access Registry are under consideration by regulators and stakeholders.

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