Macro Economy

The lights look bright, but not enough to party

Maulik Madhu BL Research Bureau | Updated on January 17, 2018 Published on August 21, 2016


bl22_power jam

Power production is up, but tariffs can ease only if costs go down

Ample domestic coal supplies have helped ramp up the country’s power generation in recent times. While the improving power supply situation is comforting, it may not translate into any relief for consumers.

The jump in Coal India’s production in 2015-16 saw India produce 943 billion units of thermal (coal and gas-based) power in this period, up 7.4 per cent from the previous year. Supply of subsidised, imported gas by the government to stranded gas-based power plants also helped the surge.

Costs count

But power tariffs are unlikely to ease unless the cost of the fuel goes down.

In May, CIL hiked the price of certain grades of coal used by the power sector. The doubling of the clean environment cess (CEC) to ₹400 a tonne in February has also imposed an additional burden. While global coal prices have been falling, imports may not be a cheaper alternative for plants situated far from the coastline.

According to Ashwini Chitnis, Senior Research Associate, Prayas (Energy Group), a not-for-profit organisation in the energy sector, since tariffs are set for a full financial year, generation costs need to remain low for at least a year for its impact to be felt on tariffs. Further, the CIL price hike and the CEC increase will also add to the generation cost and may erode the benefit of low market prices.

And yet, tariffs have been pushed down thanks to higher power generation, albeit in a limited way. In the absence of adequate long-term buyers, the additional electricity production is finding its way to the short-term market (contracts of less than a year). This includes the buying and selling done on power exchanges, through power traders and also direct trades between discoms. According to Rajiv Malhotra, Executive Director and Chief Risk Officer, PTC India, power is being sold on the exchanges (distress sales) as long as the generation companies recover at least the variable cost of production. To add to their woes, there is insufficient demand from the cash-strapped discoms. Spot power prices are therefore falling, and are turning out to be lower than the rates under long-term power purchase agreements (PPAs).

Why tariffs haven’t fallen

However, this cheap power has had virtually no impact on overall power tariffs.

This is because short-term trades account for less than 10 per cent of the country’s total power market.

Most discoms procure over 90 per cent of their power from generation companies under long-term PPAs.

“Even if no power is drawn, discoms have to still pay the generating stations for the fixed cost,” says Praveer Sinha, CEO and MD, Tata Power Delhi Distribution. As for industrial and commercial customers, only a small percentage of them are accessing the exchanges.

More power to the people

Improved power generation can, however, translate into better supply, and relatively lower tariffs.

Today, discoms can choose to buy cheap electricity from power exchanges (day-ahead contracts) and from DEEP, the Power Ministry’s online portal for short-term power procurement (few months’ contracts). Falling procurement costs can enable the State Electricity Commissions to pass on the benefit of this to consumers.

According to Praveer Sinha, for the utilities to effectively utilise the short-term market, they should be allowed to terminate PPAs from expensive and obsolete power projects.

Published on August 21, 2016

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