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Falling merchant prices take shine out of power stocks

Falling merchant prices take shine out of power stocks
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First Published: Mon, Mar 21 2011. 04 28 PM IST

Updated: Mon, Mar 21 2011. 04 28 PM IST
New Delhi: Is there no end to the darkness surrounding power companies? This set of firms has been underperforming the benchmark Sensex for quite some time now, but the summer was supposed to bring cheer with its typical rise in demand and higher merchant power prices.
There is usually a sudden surge in power demand this time of the year as the summer approaches and state governments scramble. But all this action is missing in 2011. Thanks to 10,000 megawatts of capacity additions and sloppy state electricity boards, prices of three-month contracts are falling sharply. Even though there is demand for power, inadequate infrastructure and poor financial health of the state electricity boards is driving merchant power prices lower, notes Harshvardhan Dole and Devesh Agarwal of IIFL.
They write:
With the onset of summers, the overall base demand as well as peak demand for electricity in India has started to rise. This along with the elections in the key states of West Bengal and Tamil Nadu are also resulting in higher demand. Base demand has gone up by 3% y-o-y and 4% q-o-q; the increase in peak demand is even starker at 6% y-o-y and 4% q-o-q. However, unlike in the earlier years, where such pick-up in demand would have led to rise in power prices, in FY11 power supply has improved, thereby limiting the price increase.
And who are the losers?
Those dependent on merchant power sales for a majority of revenues. Expect to see a scramble to tie-up longer term supply contracts.
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First Published: Mon, Mar 21 2011. 04 28 PM IST
More Topics: Markets Update | Power | Stocks | Energy | Inflation |