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Spot power price surge unlikely to stay, prices to moderate: India Ratings

The recent surge in Indian spot power prices on the electricity exchanges is unlikely to sustain for a long time owing to the huge availability of spare capacity and the inability of generators to tie-up long-term power purchase agreements (PPAs), ratings agency India Ratings said today.

The agency expects short-term power prices to remain in a range between Rs 3 per unit and Rs 3.5 per unit. Power 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, India Ratings said.

While the Plant Load Factor (PLF) of thermal power plants improved marginally during in the first five months of 2017-18, it continued to be lower than the record high of 75 per cent in 2010-11. With the capacity addition in under construction thermal power plants and increasing focus on renewable energy with solar tariff -- at Rs 2.44 per unit in May 2017 -- being lower than thermal benchmark NTPC price of Rs 3.3 per unit, renewable energy is likely to play a crucial role in power generation over the coming years.

The PLF of thermal power plants is unlikely to inch-up significantly and most likely remain below 65 per cent even if demand was to grow at a healthy rate of 7-8 per cent over the next two to three years. “Thus, India Ratings 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,” the agency said in a report.

It added that 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. According to estimates, the variable cost of generation on imported coal works out to nearly Rs 3-3.3 per unit given the thermal coal prices surged to $100 per tonne leaving around Rs 1 per unit to meet fixed costs, including repayment and interest servicing. High gross margins could incentivise other generators to restart their power plants.

The short-term spike in the energy tariff also resulted from capacity shutdowns in nuclear power generation plants leading to supply being lower than demand. This situation could have been averted with proper planning by distribution companies and tying up of power over the short-to-medium term as opposed to accessing the day-ahead market for bridging the gap, India Ratings said.

“The 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,”” the agency said. Also, the coal plants were running with low inventory in the beginning of September and, hence, their ability to supply power in the event of an increase in demand was limited.

Coal inventory at plants reduced to a mere 11.9 million tonne as on 31 August 2017 as compared to 28.4 MT on 31 August 2016 as some power generators preferred lower inventory at their stations. Lower production from Coal India (CIL), which recorded a 1 per cent decline between April and August this year, also led to the reduction in inventory.

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