Graphic: Mint
Graphic: Mint

Record spot electricity prices may hold a silver lining for stressed power plants

If demand continues to see the current steady growth then the peak utilization can reach as high as 78% in five years

The rapid rise in spot electricity prices, reflecting the tight demand-supply situation, strengthens bankers’ hopes for better realizations from stressed thermal power plants. SBICAP Securities Ltd argues in a note that the market may be wrongly focusing on average utilization levels which are at 60%, while utilization levels at peak demand are crossing 70%. If demand continues to see the current steady growth then the peak utilization can reach as high as 78% in five years, SBICAP Securities’ analysis shows (see chart).

This can trigger a continued rise in spot electricity tariffs as no new fresh large-scale capacities are being built in conventional power now. Renewable energy, which is seeing notable additions, is yet to cater to peak demand.

Demand varies depending on the season and time of the day. India generally sees heightened demand during the evening (6-9pm). Power distribution companies plan for such a spike in demand and secure supplies accordingly. But if peak utilization rises to optimal levels then the power distribution companies will need to find new sources of electricity, or rather, new plants.

Finding large sources of power in a short span of time will be tough. As pointed out earlier in this column, it now takes as long as five-eight years to build a greenfield coal-fired power plant.

The situation can help stressed power plants attain better value. “Nearly 40 GW of power assets with aggregated debt of 1.74 trillion are stressed. If our hypothesis is right these assets will be bid for aggressively," SBICAP Securities said in a note. “Distressed power assets can be priced for execution risk (in the bid price) unlike greenfield projects." One gigawatt (GW) equals 1,000 megawatts.

The broking firm expects the write-offs or the haircuts for bankers to be low (around 20%) for operating projects with power purchase agreements (PPAs). The haircuts are expected to be higher for plants under construction and without PPAs.

It should be noted that the current spike in spot electricity prices was preceded by low coal inventories at thermal power plants, the rise in coal prices in international markets and high maintenance shutdowns.

If the fuel situation sees drastic improvement—in terms of availability and price reduction (for coal and gas)—then the existing capacities will be able to cater to a significant portion of the incremental demand.

But that is unlikely. Based on the current circumstances, there is a growing view that new capacities will be required sooner than expected.

“Thermal power capex is not required till FY22 given 40GW under construction and current stranded capacity of 25GW (based on power ministry report). However this may change if power demand growth is higher than current 6-7% and growth in renewables is less than the expected 175GW by FY22," analysts at JM Financial Institutional Securities Ltd said in a note after meeting power sector officials in Delhi.

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