Merchant power tariffs stay subdued

Purchasing power from exchanges and power trading companies is gaining a larger share in the power transactions in the country. Traditionally, power was bought mainly through long-term power purchase agreements between the buyer and the seller.

The share of such open market transactions went up from 7.5 per cent in 2008-09 to 12 per cent of the total generation volumes in the first six months of the current fiscal. From 4.1 billion units (kilo-watt hour) in September 2008, these transactions more than doubled to 8.5 billion units in September 2011.

Even as the share of open market purchase has gone up during this period, the revenues realised by these merchant producers and other players in the short-term market haven't gone up significantly. The reason being, the per-unit tariffs realised by the players are close to 50 per cent lower than what they were in 2008-09 fiscal.

Fall in tariffs

The weighted average tariffs realised by power traders and power exchanges has fallen from around Rs 7.5 per unit in 2008-09 to around Rs 4.1 per unit during the first six months of the current fiscal. This is despite the cost of power generation rising during this period.

The reason for the declining tariffs of merchant power is the frail health of the buyers (the State electricity boards). Steep losses suffered by buyers meant they were choosing load shedding over buying expensive power. Also, the demand for power didn't grow at the pace anticipated by the players.

Demand-supply gap

During the six months ended September 2008, there was 10.5 per cent of gap between the demand and supply for power generated. This deficit shrunk to 6 per cent for the six months ended September 2011.

The correlation between energy demand-supply gap and merchant tariffs is 0.72, indicative of the responsiveness of merchant tariff spikes to energy deficit. For instance, during the strike at Singareni collieries in October, the coal inventories fell and, as a consequence, the power generated from coal fired plants declined. This led to average tariffs shooting up from Rs 3 per unit on power exchanges in September 2011 to more than Rs 5 per unit in October. The average tariffs are currently back to less than Rs 4 per unit on the power exchanges.

It is also observed that merchant power transaction tends to rise before Assembly/general elections. In the run-up to the elections, Tamil Nadu was among the top power buyers in the open market.

Similarly, this time around, Uttar Pradesh and Punjab, which have Assembly elections coming up, are the top buyers of short-term power. During the general election in 2009 , the tariffs were on an average in the range of Rs 6.5-8 per unit.

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