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There has been a steady drop in utilization levels of the thermal power industry despite steady growth in generation.
There has been a steady drop in utilization levels of the thermal power industry despite steady growth in generation.

Why the pain in thermal power may be enduring

Larger transformations are at work and if the current indications are anything to go by, the challenges will persist for some time

Despite the steady growth in coal-based electricity generation, the fortunes of the producers haven’t seen a noticeable improvement. In fact, rather contrarily, the business environment for some of the participants has worsened. So much so that two companies have publicly said that they are no longer interested in new investments in thermal power plants.

As the chart shows, there has been a steady drop in utilization levels of the thermal power industry despite steady growth in generation. Utilization levels trended lower as the power projects under construction came on stream. Also, the rise of renewable power and the regulatory requirement to source this energy has weighed on thermal power demand growth to some extent.

But larger transformations are at work and if the current indications are anything to go by, the challenges will persist for some time.

One of them is the steep drop in renewable energy tariffs and the dent to thermal power competitiveness. Even as renewable power generation is confined to a particular time of the day and faces (generation) forecast challenges, if the downtrend in project costs and tariffs continues then the renewable energy cost can even drop below the variable cost of generation in some thermal power plants. This can further drive power distribution companies or discoms to question thermal power prices, warns India Ratings and Research. “Cheaper renewables could lower the scheduling of the coal-based power and lower the interest on the part of discoms to continue with long-term PPAs," says India Ratings. PPA is short for power purchase agreement.

Two, excess capacities and the abundant availability of electricity in the open market means there is limited reason for the discoms to rush to sign long-term PPAs, which are crucial for the long-term viability of the projects. Purchases are moving towards short- to medium-term contracts of less than five years.

While the ongoing central government-led reforms are expected to lift demand, recent stakeholders’ interactions show demand is not seeing a major a boost as envisaged by many. “Madhya Pradesh (MP), Maharashtra, Rajasthan and Andhra Pradesh have started supplying power round the clock. However, this has not boosted overall demand. Peak load has declined in MP after feeder separation," Motilal Oswal Securities Ltd said in a note after attending a conference on the power distribution sector.

Worse, interactions indicate that the above mentioned discoms have signed too many PPAs. Indeed, the signed PPAs are sufficient to meet the next two-three years’ demand growth. “We maintain our view that electricity demand growth is unlikely to exceed ~7% over the medium term and new long-term PPAs are unlikely, as the states have already signed enough PPAs," added Motilal Oswal.

Of course, many of the demand benefits are being seen from badly-run discoms in states such as Uttar Pradesh. While electricity demand from the state indeed has risen, PPAs are rather slow in materializing.

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