Spot power prices have strengthened after declining for three quarters and currently a unit costs Rs5.80 on average—the highest since 31 October 2009. Such firmness is a sign of market tightening, which we expect would last through the March-June period.
Firmer user interface (UI) prices, in turn, act as a benchmark for bilateral short-term power trades, and utilities expect prices to average at least Rs6 per unit through the summer. Based on our interaction with industry sources, we expect prices in the southern region to remain above average, given grid congestion. We retain add on Jindal Steel and Power Ltd (JSPL) and Tata Power Co. Ltd, both of which have among the highest exposures to short-term power prices.
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Since the last week of February 2010, day-ahead power prices as reported by the Indian Energy Exchange (IEX) have shown consistent firmness. Present day-ahead prices are the highest since 31 October 2009 and are a good indication of market tightening as India approaches summers.
This pickup in power prices follows a decline of almost three quarters after the general election in May 2009. During the election period, spot prices had remained firm because distribution companies purchased expensive power under political compulsion. In Maharashtra, the discom was even given a specific grant of Rs400 crore to purchase expensive power during April and May 2009.
After the election, such discoms resorted to load-shedding as there was no political compulsion or economic grants to purchase expensive power. This is largely reflected in the year-to-date (YTD) average price, which is down 30% year-on-year (y-o-y) from Rs7.30 per unit to Rs5.10 per unit.
Our discussions with industry players suggest that the firmness in prices is due to pick up in demand in view of change in weather; massive slippages in capacity additions during the year; and reduction (in some cases, even a complete halt) of supplies from states that were exporting power.
Other systemic issues causing rise in power prices are decline in water reservoirs of hydro power projects due to below average monsoon rainfall leading to lower generation; fall in wind power generation in Tamil Nadu; and congestion in the transmission corridor that connects the southern region to central India.
Firmness in demand and lack of incremental generation capacity is also pushing up UI rates. Private gencos and certain captive power plants (CPPs) with grid connectivity are basing their negotiations for “off-exchange” (bilateral) trades on the elevated UI prices. Given this power deficit, utilities expect round-the-clock (RTC) prices in the exchange to stabilize at around Rs6 per unit.
Firmness in spot prices would benefit gencos that have uncommitted power and have assured fuel supplies to operate plants near-peak capacity. JSPL is, at present, the largest merchant power producer in India and sells 650-700MW power. It is progressing well to add around 20% capacity to its portfolio over the next quarter and there are plans to sell power from these units through short-term transactions. With 100% fuel security and complete control over power evacuation, JSPL is the best play on merchant power markets in India, in our view.
Tata Power, among others, also plans to expand its portfolio of merchant power capacity. KSK Energy Ventures Ltd plans to add 270MW capacity over the next quarter. However, since it has already entered into short-term power purchase agreements for selling this power, we do not expect its earnings to be affected from the current firmness in power prices.
Among others, Adani Power Ltd and JSW Energy Ltd also have merchant capacities in their portfolio and could benefit from trend reversal if they are able to source fuel at favourable rates. Given the clarity on fuel sourcing, and rising share of merchant capacities, we retain add on JSPL and Tata Power, and reiterate that they offer the best plays on short-term power prices.
Graphics by Ahmed Raza Khan/Mint