Surge in spot power prices unlikely to sustain, says Ind-Ra

The recent spike in spot power prices on the power exchanges is unlikely to sustain over the medium term in light of significant spare capacity and inability of generators to tie up long-term power purchase agreements (PPAs), according to India ratings and Research (Ind-Ra).

The agency expects short-term power prices to remain rangebound at Rs 3/kwh-Rs 3.5/kwh.

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

Although plant load factor (PLF) of thermal power plants improved marginally during the current fiscal to 59.9 per cent (58.96 per cent), it continued to be lower than the record high of 75 per cent in FY11.

Given the capacity addition in under construction thermal power plants and increasing focus on renewable energy with solar tariff at Rs 2.44/kwh in May 2017 being lower than the thermal benchmark NTPC price of Rs 3.3/kwh, the renewable energy is likely to play a crucial role in power generation over the coming years.

PLF of thermal power plants is unlikely to inch-up significantly and most likely remain below 65 per cent even if the demand was to grow at a healthy rate of 7 per cent-8 per cent over the next two to three years.

Thus, Ind-Ra believes the presence of large unutilised capacities is unlikely to lead to any significant exchange price volatility, despite any future increase in demand at a higher energy tariff.

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.

The rating agency estimates variable cost of generation on imported coal to be nearly Rs 3/kwh-Rs 3.3/kwh, given that thermal coal prices surged to $100/t, leaving about Rs 1/kwh to meet fixed costs, including repayment and interest servicing.

High gross margins could incentivise other generators to restart their power plants.

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.

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.

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