Hike in spot prices may offer little relief to stranded merchant power capacity

Ksenia Kondratieva Mumbai | Updated on January 10, 2018

Issues such as like low demand and coal shortages continue to saddle power players

The recent increase in the average spot power tariff on the Indian Energy Exchange (IEX) is unlikely to continue for long or bring any long-term relief to merchant power plants. This is because issues such as low demand and coal shortages continue to saddle the power industry.

An increase in the merchant power tariff from the average of ₹2.5/kWh to ₹3.12/kWh in August and ₹4.11/kWh in September, touching a record high of ₹9.9/kWh last week, is mainly caused by a seasonal power demand uptick coupled with the reduction in hydro and nuclear generation.

According to ICRA, the growth was largely supported by better demand in several States, including Uttar Pradesh (15.5 per cent), Telangana (12.3 per cent), Maharashtra (9.5 per cent), Andhra Pradesh (7 per cent) and Karnataka (5.8 per cent).

Shailesh Joshi, President, Energy Consulting, Feedback Infra, pointed out several other reasons for the temporary hike in merchant tariff. Coal shortages faced by many power plants leading to overhaul or maintenance breaks, as well as transmission constraints, also brought down the supply, causing spot prices to go up, he said.

Short trend

Although power players with large merchant capacities, such as JSW Energy and Jaiprakash Power Ventures, could benefit from the hike in merchant tariff and improved plant load factor, the overall merchant capacity which is estimated at 50 GW is likely to remain strained in the medium to long term, experts said.

“The spike in spot tariff is likely to be temporary and unlikely to be sustained, given the still moderate demand, albeit encouraging growth, and surplus thermal capacity available to meet energy demand,” said Sabyasachi Majumdar, Senior Vice-President & Group Head, ICRA Ratings.

According to Joshi, the trend may remain over two-three months until coal supplies improve and thermal plants enhance supply.

Chandan Mishra, Director, Power & Utilities at PWC, said a lot of merchant power was built on the basis of a growing power market. “Players believed they could make extra profits via short- and medium-term sales, but that didn’t take place in the last 10 years since the exchanges were set up. Now a lot of merchant plants are selling largely on a distress basis on the exchanges. This, at prices traditionally being in the range of ₹2.4-2.7/kWh, only allows them to service their loans,” he said.

It is doubtful that merchant players will benefit from the temporary spot price hike in the longer term, he added, as most of such projects do not have any coal linkages.

Lalit Jain, Group Chief Commercial Officer and CEO (Hydro, International Solar & Wind) at Hindustan Power, said energy trade in exchanges should be used primarily for meeting short-term demand-supply matches.

“Unfortunately, utilities and developers are using this short-term trade for long-term decision making. Considering the grid stability and efficient commercial benefits, if a utility has projected demand-supply shortages on a long-term basis, it should go for a long-term PPA,” he added.

Published on September 24, 2017

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