Business News/ Market / Mark-to-market/  Cash-strapped discoms backtrack on renewable power contracts

As renewable energy capacity additions gather pace and more green power is offered to power distribution companies (discoms), offtake is far from encouraging. A study by Mercom Capital Group says solar power offtake is seeing curtailments in Rajasthan and Tamil Nadu, impacting developers.

Earlier, channel checks by JM Financial Institutional Securities Ltd found that Maharashtra and Rajasthan are slowing power purchase agreements (PPAs) with wind energy developers, resulting in stranded capacities.

Several factors are leading to this situation—insufficient evacuation facilities; the quality and intermittent nature of renewable energy; and the achievement of renewable purchase obligation in some states.

More importantly, as Mercom points out, discoms are swapping renewable power for purchases from spot markets, where rates are low. “In Tamil Nadu, curtailment is mostly due to the utility opting to buy cheaper power from the exchanges rather than paying Rs.7/kWh for solar (the state has signed PPAs for that rate)," Mercom said in a note. KWh is kilowatt hour.

This is clearly a worry in the backdrop of increasing capacity in the sector. Two of the three states mentioned above are high renewable potential states. A substantial amount of installations are already done and more are under way.

The saving grace is that the curtailments are not widespread yet— Mercon’s report mentions curtailments in relatively expensive renewable power contracts.

But significantly, note that even though prices have come down substantially to around Rs4/kWh, they are still costlier than electricity offered on the energy exchanges (trading at around Rs2.5 per unit).

So for state electricity boards (SEBs) that are strapped for funds, low-priced spot electricity remains alluring. Rajesh K. Mediratta, director at Indian Energy Exchange, in July said states are purchasing electricity through the exchange platform to economize on power costs, and are even backing down on their costlier PPAs.

To be fair, SEBs have limited choice but to do this. The agriculture and household customer segments continue to lose money. And while industrial and commercial customers used to make up for part of the losses, a steady rise in tariffs has meant that these consumers are moving to captive and open access (purchased directly from producer).

As a consequence, the most profitable part of the business is coming under pressure and SEBs are being forced to make economical choices on power purchases.

If the situation does not improve, then the whole purpose of renewable capacity ramp-up will be defeated, and leave a sour taste for investors.

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Updated: 27 Sep 2016, 01:16 AM IST
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