Electricity discoms to trip on shunned power purchase agreements

Updated: October 9, 2017 4:31:52 AM

Electricity distribution companies could well be looking at a repeat of fiscal years 2009 and 2010, when the average procurement cost spiked between Rs 4.96 per unit and Rs 7.49 per unit, unless they ensure a judicious mix of sourcing through long- and medium-term power purchase agreements (PPAs) rather than depend solely on the spot market.

 power purchase agreements, ppa, what is ppa, ppa electricity companiesThere is clear and present danger of this given how spot electricity prices have soared on the Indian Energy Exchange (IEX) over the past month.

By-Vivek Sharma

Electricity distribution companies could well be looking at a repeat of fiscal years 2009 and 2010, when the average procurement cost spiked between Rs 4.96 per unit and Rs 7.49 per unit, unless they ensure a judicious mix of sourcing through long- and medium-term power purchase agreements (PPAs) rather than depend solely on the spot market.

There is clear and present danger of this given how spot electricity prices have soared on the Indian Energy Exchange (IEX) over the past month. To be sure, the peak evening slot on September 13, 2017 saw a surge to Rs 9.91 per unit, compared with Rs 3.50 for the corresponding slot in fiscal 2016. The average market clearing price, too, has almost doubled over the past month. The uptrend is in sharp contrast to the subdued prices witnessed in the past three years.

What gives? Some temporary factors, and some fundamental ones. Take demand, for one. Volume on the IEX rose to 173 million units (MU) on September 15 from 98 MU on August 15, with buy/ sell bids in the northern segment rocketing to 46/6.5 MU from 20/12.5 MU.

The demand surge over the past six months can be attributed to increased supply to domestic consumers. Consequently, load-shedding in UP is down dramatically from 91 hours per month in August 2016 to 13 hours in August 2017. The state is also speeding up the electrification of 1.12 crore households.

Such surge in demand will further increase as the economy grows. Therefore, it would be short-sighted of discoms to try and wriggle out of higher-priced PPAs. A structural upshift in demand evens out the long-term cost arithmetic.

The Saubhagya scheme announced recently will lift demand further. As per the scheme, there could be additional energy need of about 80,000 million units per annum.

Coming to the supply side, there is a need to consider fundamental costs before looking at their potential reflection in tariff. The typical base cost for a new coal-based power plant is ~Rs 5-6 crore per MW. The recently constructed NTPC Mauda thermal plant has a project cost of ~Rs 5.5 crore per MW (including interest during construction and financing charges of ~Rs 0.5 crore per MW), and the Central Electricity Regulatory Commission (CERC) has approved for it a tariff of ~Rs 4 per unit. Then there are additional costs such as of delays and past losses from stranded capacities and low plant load factors. And, even if conventional developers take a haircut on their returns, they still have to cover the debt in their books, interest cost and past losses.

For renewables, while the overall story looks good, cut-throat competition has spawned aggressive pricing. Indeed, low-bid projects may not even see the light of day, with developers such as ACME looking to exit because the cost of solar panels is rising.

Clearly, the talk that spot electricity prices reflect marginal cost (as is the case in developed economies) is a myth that will bust given the huge unmet demand, the surge in new connections, and the fact that generators are unable to recover even the base cost of debt.

The writer is senior director, CRISIL Infrastructure Advisory

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