Bridge India

Spike in spot power prices likely to be temporary

Average clearing price for power on the energy exchange has been inching up from INR 2.61/kWh seen on 2rd September 2017 and spiked up to a high of INR 9.91/kWh last week. Current prices are in the range of INR 5.00 – 6.20/ kWh range. These high prices are in stark contrast to the past two years, when power was selling at near a ten-year low of INR 2.20-3.80/kWh. Exchange prices are regarded as a barometer of overall power demand-supply balance in the country and low prices have been seen as an indicator of excess supply situation.

  • The current spike in spot prices has come about largely because of supply side issues rather than any sustained pick-up in demand ;
  • Shortfall arising from scheduled maintenance of 10 GW of thermal and nuclear capacity, reduced wind and hydro generation and an uptick in demand could not be compensated through India’s underutilized thermal fleet due to a seasonal coal shortage;
  • The spike sends a signal to consumers and DISCOMs that they need to proactively manage their power procurement plans and that reliance on short-term trading comes with its own set of challenges;

DISCOMs meet bulk of their power requirement through long-term purchase contracts under fixed or cost-plus prices. Volume of power traded in the market is only about 150 million units per day, around 4 per cent of total generation of around 3,750 million units per day. Despite low trading volumes, spot prices can be a very useful indicator of supply-demand situation in the country.

Power deficit in India has reduced consistently over the past 5 years. This is primarily because power demand growth has been sluggish even as India continued to add generation capacity at a rapid pace. Co-relation between spot prices of power and power deficit can be seen in the chart below.

Figure – Power spot prices and deficit

Presentation1

The current spike in spot prices has come about largely because of supply side issues rather than any sustained pick-up in demand. There have been slippages in hydro and wind power generation owing to reduced water levels in reservoirs in south India and shortfall in wind resource at the end of monsoon season. This, combined with scheduled maintenance of some thermal and nuclear plants with capacities adding up to 10 GW, and a demand pick from agricultural and air-conditioning loads, has led to a short-term power deficit in the country. Thermal power plants were operating at 58% utilization rate in August but they have been unable to pick up the slack due to seasonal shortage of coal during monsoon season.

Most analysts are unanimous that spike in spot tariff is likely to be temporary given the moderate demand growth and low utilization of thermal projects.

What are the implications for the solar sector? Existing projects are unaffected because they mostly sell power under fixed price, take-or-pay agreements. Demand for new solar projects, which has been affected by the surplus power situation, is linked to secular growth in demand and unlikely to get any boost from the shot-term price movements. But the spike does send a signal to consumers and DISCOMs that they need to proactively manage their power procurement plans and that reliance on short-term trading comes with its own set of challenges.

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