Ind-Ra: Surge in Spot Power Prices Unlikely to Sustain, Prices to Moderate

India Ratings and Research (Ind-Ra) believes the recent spike in spot power prices on the power exchanges would not sustain over the medium term in light of a significant amount of spare capacity and the inability of generators to tie-up long-term power purchase agreements (PPAs). The agency expects short-term power prices to remain range bound at INR3/kWh-INR3.5/kWh.

Distribution companies have been more accommodative of signing short-to-medium term PPAs with a single tariff structure than long-term PPAs with a two-part tariff structure.

Although the plant load factor of thermal power plants improved marginally during 5MFY18 to 59.9% (5MFY17: 58.96%), it continued to be lower than the record high of 75% in FY11. Given the capacity addition in under construction thermal power plants and increasing focus on renewable energy with solar tariff (INR2.44/kWh in May 2017) being lower than thermal (benchmark NTPC price of INR3.3/kWh), renewable energy is likely to play a crucial role in power generation over the coming years. Moreover, the plant load factor of thermal power plants is unlikely to inch-up significantly and most likely remain below 65% even if the demand was to grow at a healthy rate of 7%-8% over the next two to three years. Thus, the presence of large unutilised capacities is unlikely to lead to any significant exchange price volatility, despite any increase in demand at a higher energy tariff.

Ind-Ra believes such disruptions are temporary and if these prices were to sustain it would result in super-normal profits for the generators which could attract fresh competition, pushing prices downwards. Ind-Ra estimates variable cost of generation on imported coal to be nearly INR3/kWh-INR3.3/kWh, given the thermal coal prices surged to USD100/t, leaving about INR1/kWh to meet fixed costs, including repayment and interest servicing. Ind-Ra believes high gross margins could incentivise other generators to restart their power plants.

The short-term spike in the energy tariff resulted from capacity shutdowns in nuclear power generation plants, leading to supply being lower than demand. Ind-Ra believes this situation could have been averted with proper planning by distribution companies and tying up of power over the short-to-medium term as opposed to accessing the day-ahead market for bridging the gap.

The exchange markets constitute a minor portion of the overall power market, and hence, the increase in short-term power tariff on the exchanges should not be a representative of the entire value chain.

The coal plants were running with low coal inventory entering in September 2017, hence, their ability to supply power in an event of an increase in demand was limited. The coal inventory reduced to a mere 11.9mmt as of 31 August 2017 (31 August 2016: 28.4mmt) as some power generators preferred a lower coal inventory at their stations. Lower production from Coal India Limited, which recorded a 1% decline in 5MFY18, also led to the reduction in coal inventory.

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