Surge in spot power prices unlikely to sustain, says Ind-Ra

The recent spike in spot power prices on the power exchanges is unlikely to sustain over the medium term in light of significant spare capacity and inability of generators to tie up long-term power purchase agreements (PPAs), according to India Ratings and Research (Ind-Ra).

The agency expects short-term power prices to remain range bound at ` 3/kwh – `3.5/kwh. 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.

Although plant load factor (PLF) of thermal power plants improved marginally during 5MFY17 to 59.9 per cent (58.96 per cent), it continued to be lower than the record high of 75 per cent in FY11.

Given the capacity addition in under construction thermal power plants and increasing focus on renewable energy with solar tariff at ` 2.44/kwh in May 2017 being lower than the thermal benchmark NTPC price of `3.3/kwh, the renewable energy is likely to play a crucial role in power generation over the coming years.

Ind-Ra believes 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 per cent-8 per cent over the next two to three years. Thus, the research agency 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.

Ind-Ra also believes 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. Ind-Ra estimates variable cost of generation on imported coal to be nearly ` 3/kwh – ` 3.3/kwh, given the thermal coal prices surged to $ 100 per tonne, leaving about ` 1/kwh to meet fixed costs, including repayment and interest servicing.