As demand grows, open market electricity tariff at 5-year high

At the India Energy Exchange (IEX), the average electricity tariff for August was ₹3.12 a unit (kilowatt hour) with peak tariff touching ₹7.91. In the first seven days of September, the average was ₹3.34 a unit and maximum at ₹8.7 a unit.

The electricity sector did not witness such high prices in the last five years. Previously the Southern region used to pay higher prices due to lack of connectivity to the national grid but that anomaly too was removed since 2014.

Electricity tariff normally moves up in end-monsoon. In September 2016, the average tariff was ₹2.42 a unit, up from ₹2.16 a unit in August 2016. Peak tariff increased from ₹4.4 a unit to ₹4.85 a unit. But this year is different. The average tariff was relatively firm at around ₹2.5 a unit beginning June. More significantly, the evening peak hour tariff hovered around ₹6 a unit during June-July 2017 as against ₹3.5-4 a unit during the same period in 2016.

Apparently this is due to hectic short-term buying by the State distribution utilities (discom) to bridge the peak deficit. The trend gained momentum in August-September with West Bengal, Uttar Pradesh, Telangana, Maharashtra and Bihar emerging as major buyers.

Kameswara Rao, Partner, PricewaterhouseCoopers (PWC), doesn’t have any particular clue to explain the trend. But he thinks the tariff growth is primarily demand driven and not due to shortfall in supplies.

“It's hard to pinpoint, but the demand growth is probably coming from improved rural supply, and from large energy users who are finding it increasingly hard to get open access consents for direct purchases from third party sources,” he told BusinessLine .

Rao has a point. On a year-on-year basis, the electricity generation grew by 4.7 per cent in May, six per cent in June and close to 12 per cent in July. Sequentially, electricity demand grew by a nearly two per cent in July this year, as against a three per cent drop last year.

Clearly, there are distinct signs of demand growth in July. The central electricity authority is yet to publish August 2017 figures. One has to wait a few months to know if the trend is sustainable.

However, there could be a fundamental reason behind the tariff surge. India doubled the generation capacity to 326 GW between 2007 and 2017. The over-supply and low tariff nearly stopped the flow of investment in large thermal capacities vis-a-vis the demand growth.

“We have fewer large capacity plants getting added now, while the demand continues to grow. So, we could see suppliers' terms improving in coming months,” Rao said.

If Rao is correct, that indeed calls for a revision of the power procurement strategy on the part of States.

As over-supply forced generation companies to sell electricity merely at the recovery of operating cost over the last few years; States dumped long term power purchase agreements (PPA) for short term buying.

West Bengal cancelled PPAs worth over 1000 MW. The Yogi Adityanath government in Uttar Pradesh recently cancelled bids for 3800 MW supply contracts. If the current trend strengthens, States have to reopen PPAs, bringing the much needed stability in the electricity sector.

Some observers, however, feel that the current surge in tariff is temporary and might have been triggered by unexpected drop in hydel supplies in August. Thermal plants couldn’t tap the full opportunity as they maintained low fuel inventory to cut costs.

According to the former Coal India (CIL) Chairman, Sutirtha Bhattacharya, with PLF (Plant Load Factor) of thermal power plants ruling below 60 per cent the country’s generation sector has abundant spare capacity to meet the current surge in demand.

He is looking forward to CIL tapping the opportunity and clearing huge stock. Low demands in 2016 and the resulting stockpiling forced the miner to restrict production earlier this year. Now that the demand is back the miner increased despatches by 15 per cent in August.

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