Mumbai: Private power producers are trying hard to sell the merchant power dream to investors, but may find profits earned by that route dwindling as more capacity is expected to come onstream by 2012-13, industry watchers said.
Merchant power, or power sold in the spot market, has invited a lot of attention from investors, analysts and corporates, as it commands higher rates than power sold though long-term sale agreements. In 2009, the premium it garnered over long-term rates peaked as high as Rs8-9 a unit.
Private project developers usually apportion up to 50% of power generated to merchant use, hoping to reap better profits. The rest is sold to state utilities on long-term contracts at comparitively much lower rates.
“At least for the next two to three years, power shortage is going to be acute. We are not seeing any big crash as far as merchant power rates are concerned,” said Seshagiri Rao, chief financial officer, JSW Group, that runs JSW Energy.
Power producers cite huge demand-supply gap to support their case for higher merchant rates. Central Electricity Authority (CEA) has predicted 12.6% peak power deficit for 2009-10, and sellers hope to earn a decent premium in years to come.
The magnitude of deficit depends on how soon new power projects come up. India is unlikely to achieve its capacity addition target of 78,700 MW by 2012, although various government agencies differ on the amount of shortfall.
Earlier this month, the power minister said the country will achieve 62,374MW capacity addition by 2012 with “high level of certainty”, while CEA estimates suggest the target could fall short by as much as 21,000MW.
Analysts and industry watchers agree that the power deficit is unlikely to be bridged in a hurry and India would remain a power hungry market, at least in the near future. But this is unlikely to continue forever, they add.
“We believe that power deficit situation is likely to stay until FY17,..(but) the bargaining power is likely to shift towards the buyers,” by FY13, said Bhargav Buddhadev, analyst at Noble group in a recent note.
By 2012-13, electricity available for sale in the short term market will increase 10-fold to 34,000MW, Buddhadev said, forcing merchant rates to ease. But industry players have differing views on the quantum of fall.
“May be it will not be Rs10 or Rs9...which we had seen last year. But it will be decent...around Rs6,” said Subbarao Amarthaluru, GMR group chief financial officer.
Even if peak merchant power rates stay at Rs5 a unit till 2012-2013, it would still be higher than long-term power rates and power producers will be able to get some premium, if not the highest one, analysts said.
However, regulatory moves to ensure affordable power and policy changes may see direct or indirect caps on merchant power rates, though the power minister has denied any move at direct capping so far.
The federal regulator, Central Electricity Regulatory Commission (CERC), had capped merchant power tariff at Rs11 a unit in September for 45 days.
Its counterpart in Andhra Pradesh (AP) recently reversed the state government’s earlier decision to allow GMR Infra and GVK Power to sell 20% power produced in their gas based power plants in AP via spot market, media reports said.
However, developers whose merchant power plants are currently up and running are better off than those with future plans, analysts said.
“If you come up with a generation capacity early and recover your capital costs when merchant tariffs are high, thereafter even if merchant tariffs fall your capital costs are recovered,” said an industry official, who did not wished to be named.