Surging spot prices of electricity will continue to rise in the near-term, driven by both structural and seasonal reasons. According to rating agency Crisil, the reasons for this include unmet and suppressed demand, no new thermal capacities announced in the past two years, and inability to meet peak demand because of the mismatch with the renewable energy generation curve and insufficient domestic coal supplies.

And plants stressed by ongoing litigation and change in law provisions are unable to run at full capacity, thereby, adding to supply constraints. The monthly market clearing price at the Indian Energy Exchange (IEX) has spiked up over 25 per cent from Rs 3.20 per unit in January this year to Rs 3.97 in March, taking the average cost to Rs 3.43. This is as against an average of Rs 2.50 logged in the corresponding period of the past two fiscals.

What’s more, monthly peak prices on power exchanges this year have averaged at Rs. 7.1, which is almost twice the levels in fiscal 2017. “We are staring at a huge problem because peak power deficit scenario is unlikely to improve anytime soon,” Vivek Sharma, Senior Director, Crisil Infrastructure Advisory, said.

“To boot, demand will surge afresh given an additional 4 crore households will be electrified over 2018 and 2019, and also because general elections and some state polls are imminent. Additionally, domestic coal supplies would come up short, which means continued dependence on imported coal, the prices of which are expected to stay elevated. This will only push the marginal cost of electricity further up,” he said.

However, the surge in demand will help power producers recover a part of their fixed costs, which has been a challenge in the past. This is important because fixed costs are expected to rise following tighter environmental norms.

As India focusses on installation of 175 GW of renewable energy by 2022, the power purchase cost is expected to rise as solar modules become costlier following the levy of Goods and Services Tax, customs duty and potential levy of anti-dumping duty. Rising penetration of renewable energy will also result in frequent cycling and lower plant load factors at coal-based plants, thereby, leading to higher variable cost.

Pranav Master, Director, Crisil Infrastructure Advisory, said, “In light of a structural increase in spot power prices over the medium term, it is imperative that discoms realign their power procurement strategies. Re-evaluating demand-supply projections, ensuring a balanced mix of generation sources as well as medium-to-long term power purchase agreements (PPAs) would be crucial to mitigate the spike in their power purchase cost that, in turn, could affect their financial position.”

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