Utilities: Merchant tariff rates log September spike

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New Delhi | Published: September 22, 2018 12:05:50 AM

The recent spike in merchant tariff rates on the exchange to above Rs 5/kwh brought with it a sense of déjà vu, as a similar seasonal trend was seen in September, 2017 with spot prices having gone above Rs 5/kwh for a brief period of time.

Poor thermal generation in face of growing demand behind event; rise augurs well for select players

The recent spike in merchant tariff rates on the exchange to above Rs 5/kwh brought with it a sense of déjà vu, as a similar seasonal trend was seen in September, 2017 with spot prices having gone above Rs 5/kwh for a brief period of time. We reiterate that a combination of a receding monsoon, coal plants resuming operations from maintenance shutdowns and spike in demand does lead to tariff spikes more often than not in September.

Poor thermal generation against rising demand leads to rise in spot tariffs

Spot market prices in the last one week spiked up to well over `/kwh after having remained at .3/kwh in FY2018 and at .9/kwh for YTDFY19. A combination of improved demand as well as supply-side constraints led to the increase in spot prices during the period. We do highlight that the daily purchase bids in the last fortnight have well crossed 250 MU while sales bid has dropped to 200 MU reflecting the mismatch in demand-supply leading to the spike in merchant tariffs. Consequently average tariffs have risen to .3/kwh (.5/kwh in September, 2017).

Degree of increase may vary, though prices in September usually see a temporary spike

We highlight that the seasonal changes towards the end of the monsoon season typically see demand improving and hydro generation declining, even as coal inventories at power plants are still being re-stocked. We highlight that on average realisations in September have enjoyed 15% premium over full-year realisations. In September, 2018, the daily volumes of 160 MU are 7% above the average daily volumes in FY2019 so far.

Tariff spike more seasonal than structural, though higher prices augur well for select players

The recent spike in merchant tariffs is more seasonal than structural; though a general increase in merchant tariffs augurs well for earnings of players such as JSW Energy and JSPL among our coverage. We do highlight though that the increase in prices of imported coal as well as a depreciating local currency takes away the benefits of improving merchant tariffs, especially for JSW Energy among our coverage universe. We note that while a `.6/kwh increase in merchant tariffs improves fair value estimate by `25/share, every $5/ton increase in prices of imported coal reduces fair value by `8/share and every `2/$ depreciation in local currency erodes `4/share in fair value estimates. Maintain our REDUCE rating on JSW Energy with a target price of `70/share.

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