Short-term contracts find favour with power discoms3 min read . Updated: 21 Jun 2017, 03:29 AM IST
Low wind and solar power tariffs and tepid demand are driving power discoms and generators away from long-term agreements
New Delhi: India’s electricity sector is poised for a structural shift with distribution utilities becoming increasingly averse to entering into long-term power purchase agreements (PPAs) for thermal projects.
Even as lenders want tariff certainty for the loan period, generation utilities are looking at developing a portfolio of short-term power procurement contracts ranging from “day ahead" to the ones spanning one, three or five years, to protect themselves from disruptions caused by record low green energy tariffs.
This assumes importance given that India’s current installed capacity of 329,205 megawatt (MW) and projects under construction are expected to meet the country’s electricity demand until 2026.
Given that state electricity distribution companies (discoms) are not floating long-term PPAs , generation utilities also don’t want to hinge their growth on one set of customers. Instead, they are looking at different customer sets such as industrial clusters, discoms, individual customers and power exchanges.
Experts say this is the way forward.
“Indian power market has gradually shifted away from long-term PPAs to short and medium-term agreements. These days we find most of the procurers, even regulators at times, favouring relatively shorter-duration PPAs. Even long-term PPAs are being entered for 7-10 year duration instead of the conventional 25 years," said Abhishek Poddar, a partner at consulting firm A.T. Kearney Ltd.
Recently, the Yogi Adityanath-led Uttar Pradesh government cancelled the long-term PPAs for 15 years.
“Post Ujwal Discom Assurance Yojana (UDAY) and transparent information shared through Vidyut Pravah, utilities are becoming commercially savvy to engage and manage portfolio of power procurement contracts ranging from day ahead to 1-3-5 years rather than commit to long- term 15-25 year contracts. It surely is causing stress in the system and financial institutions need to come up with solutions on their lending products to power projects," added Sambitosh Mohapatra, partner, energy and utilities at PwC India.
Discoms are making turnaround efforts under UDAY, a debt restructure and efficiency improvement scheme launched in November 2015. UDAY mandates strict vigil on the finances and operations of state electricity boards. Vidyut Pravah, the app, allows consumers to find out the quantum and price of electricity available on the grid.
“Multiple factors have contributed to this shift, including a general expectation on continued reduction in power costs driven by renewable energy. This aspect, coupled with the fact that demand growth has been tepid, has resulted in unwillingness of procurers to tie themselves up with long-term, potentially ‘higher cost’ power," Poddar added.
The signs of early disruption are already there. There are concerns over whether the discoms will honour their commitments for projects earlier awarded at high tariffs and not waver on signing PPAs, Mint reported. (bit.ly/2pAi9dt)
However, for the new model to succeed, banks and financial institutions have to be on-board given the large long-term debt requirement for such projects. Also, bad loans are clouding the outlook for power sector lenders. As a result of subdued investments in the power sector, firms are seeing limited lending opportunities, and slowing disbursements and loan book growth.
“Ultimately new projects need to be financed up to 70%-80% through debt. The FIs (financial institutions) and banks want tariff certainty for the lending period. There is a desire of utilities to move towards medium-term contracts because cost of generation has fallen," said Deepak Amitabh, chairman and managing director at PTC India Ltd, India’s largest electricity trader. “Though it is desirable, but it doesn’t look doable in the short term due to lender concerns." PTC’s subsidiary firm PTC India Financial Services (PFS) lends to energy projects.
Spokespersons for the ministries of power, India’s largest power generation utility NTPC Ltd and power sector lenders such as ICICI Bank, Axis Bank and State Bank of India did not respond to questions mailed to them on Monday.