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The Capitalist | Energy exchange makes captive power plants more attractive

The Capitalist | Energy exchange makes captive power plants more attractive
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First Published: Thu, Feb 05 2009. 01 15 AM IST

Changing balance: The Bombay Stock Exchange building. The stock market is witnessing promoters increase their stakes in companies. Ashesh Shah / Mint
Changing balance: The Bombay Stock Exchange building. The stock market is witnessing promoters increase their stakes in companies. Ashesh Shah / Mint
Updated: Thu, Feb 05 2009. 11 00 AM IST
The balance of power appears to be gradually shifting in favour of consumers and captive power units.
Changing balance: The Bombay Stock Exchange building. The stock market is witnessing promoters increase their stakes in companies. Ashesh Shah / Mint
Captive power plants generally come up when industrial units cannot depend on erratic electricity supply. Most are usually chemical, steel and cement companies because interrupted supply would mean rejection of entire batches under process at the time of power cuts.
In 1985, captive power took on a new shape when three companies—Gujarat State Fertilizers and Chemicals Ltd, Gujarat Alkalies and Chemicals Ltd and Petrofils Cooperative Ltd—along with the Gujarat Electricity Board set up India’s first cooperative captive power plant, Gujarat Industries Power Co. Ltd. After meeting the needs of promoter companies, the surplus was sold to the state government.
Then came other large captive power plants of corporate groups Essar and Reliance, which sold surplus power to the state electricity boards through 15-25-year power purchase agreements (PPAs).
Also See Cheaper Alternative (Graphic)
Captive power generation has lately become more attractive. First, they often generate power at prices 25-80% cheaper than power from the grid. In the face of constantly increasing state electricity tariffs, it makes more sense.
Hitherto, captive power plants could not sell power without the state government’s consent. And negotiating with the state is not always easy. Moreover, there is always the risk of unpaid bills.
But the Central Electricity Regulatory Commission (CERC) has now amended its rules (Section 9), allowing any captive power plant (using 25% of its own power) to sell electricity through an open access system, without requiring any separate licence. The balance can be sold through the Indian Energy Exchange (IEX), cleared by CERC in June, and promoted by PTC India Ltd, formerly Power Trading Corp. of India Ltd, and Financial Technologies India Ltd.
IEX is an online electricity trading platform that plans to enable efficient price discovery and price risk management in the electricity market.
IEX’s shareholders include Infrastructure Development Finance Co. Ltd, Adani Enterprises Ltd,Reliance Energy Ltd, Rural Electrification Corp. Ltd, Tata Power Co. Ltd and Lanco Infratech Ltd.
IEX’s plans could put an end to 15-25-year PPAs, replacing them with three-six-month PPAs, as is the case in much of the developed world. To ensure purchasers do not default on purchase commitments, CERC has allowed execution of future purchases only against advance payment. This could see the quantum of power generated through captive units surge from around 18,000MW to well over three times the figure within three years.
Some of the power could come from companies and some from the newly developed special economic zones, which also want to give customers the benefit of cheaper power. Many captive units have already begun work on getting linked to the national or state grids so that evacuation of surplus power is possible.
All of a sudden, thanks to these modified regulations and IEX, user companies will be able to see the price difference between state tariffs and those at which surplus power from captive units is available. Expect more bargaining ahead.
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States gear up against captive power trade
Worried that some of the best producers of cheap electricity—captive power plants—will begin selling power to the national grid through the Indian Energy Exchange (IEX), many state governments are mulling legislation to prevent private players from selling to units or grids outside a state.
That may not be legally feasible.
Nevertheless, to take care of such sensitivities, IEX plans to create a separate platform for within-the-state auction, so that power generators can first opt to sell power to nearby units within the state. Private users can then pay the wheeling charges and taxes, and opt for power from a captive unit rather than from state electricity boards.
Over time many of these wrinkles may get ironed out, as the state itself will try and ensure its power pricing compares well with those provided by other firms on the power exchange. That will allow for wheeling of power to become a critical factor in price determination.
Power Grid Corp. of India Ltd will, therefore, become another interesting player in this sector. It could force governments to go easy on subsidies of free and cheap power to farmers and other political constituents.
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Markets, movements and manoeuvres
The markets are in a spin and some rather unusual developments are taking place. Perhaps for the first time in India’s history, foreign institutional investors (FIIs) have opted to divest holdings in Indian equities, while promoters of Indian ventures have opted to buy.
Here are some figures from Batlivala and Karani Securities India Pvt. Ltd’s research team: FII holding in firms went down by 118 basis points (bps), from 16.6% in September to 15.4% in December.
The last quarter of 2008 saw a net withdrawal of $4 billion (about Rs19,500 crore) from the stock market by FIIs. One basis point is one-hundredth of one percentage point.
Promoters increased their holding by 150 bps to 57.5%. The general public, however, reduced holding by 600 bps to 12%. Domestic financial institutions continued to support the market and increased holdings by 34 bps to 6.5%. Mutual funds increased their holdings marginally by 3 bps to 3.8%.
This trend is likely to be further accentuated during the current quarter. Cash-rich promoters will keep buying shares to ensure they retain the confidence of investors. The ones who are hard-pressed financially could see share prices drop more precipitously.
Graphics by Ahmed Raza Khan / Mint
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
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First Published: Thu, Feb 05 2009. 01 15 AM IST