Utilities with low exposure to merchant market may benefit

Utilities with low exposure to merchant market may benefit

The frenzy over high merchant power prices will subside as factors, such as long-term power purchase agreement (PPA) capacity and the parlous finances of state utilities and regulatory bottlenecks, come into play.

We have a bearish stance on long-term merchant power rates, based on an analysis of these factors, and prefer utilities that have less exposure to merchant power.

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In addition to power deficit, other factors, such as fresh long-term PPA capacity, fragile state utilities reeling under losses and the willingness of state regulatory bodies to allow recovery of high power purchase costs, could play a pivotal role in governing merchant power rates.

Merchant rates slid significantly in the second half of FY10 due to greater procurement in the first half of FY10 and better grid discipline. The weighted exchange-traded price rose to Rs5.50 per kWh (March, month-to-date) from Rs3.20-3.40 (January-February).

The reasons attributed for the lower rates in the second half of FY10 are: no political compulsion on states to buy costly power (as in the first half due to the general elections) and better grid discipline (less overdraw from the grid) resulting in lower unscheduled interchange rates.

The addition of capacity against long-term agreements (14 gigawatts) and international processing plant capacity (2 gigawatts) in the short-term market would benefit states such as Maharashtra, Punjab, Haryana and Uttar Pradesh, besides major buyers in the merchant market. PPA capacity is designed for baseload, so we expect peak deficit to continue.

We prefer utilities with low exposure to the merchant market: NTPC Ltd and Tata Power Co. Ltd. JSW Energy Ltd’s and Adani Power Ltd’s earnings could be volatile given high exposure to merchant power.

Despite the gargantuan deficit of about 5,000MW, Maharashtra purchased only 600MW on average in the spot market. This stems chiefly from the huge cash losses the Maharashtra State Electricity Distribution Co. Ltd (MSEDCL) suffers.

In FY10 also, against the petition to purchase 3 billion units in the traded market, the Maharashtra Electricity Regulatory Commission (MERC) had not permitted a single unit to be purchased in the traded market.

That said, MSEDCL has gone ahead and bought an average 350 million units in spot. It remains to be seen how that would be balanced in the truing-up exercise by MERC.

In the future, although demand for power would grow at about 5-7%, yet, because much of the PPA-based capacity is coming online and, most importantly, there are no political compulsions (such as elections), this would lead to, at best, last year’s level of spot buying by MSEDCL.

Despite a huge deficit of about 1,500MW, Punjab has only purchased an average 300MW in spot. Punjab State Electricity Board (PSEB) was compelled to purchase a huge amount of power in the spot market only in July, August and September, primarily because the lack of rainfall resulted in huge amount of electricity required for irrigation.

In other months, the PSEB has been a reluctant buyer despite a shortage, and in some cases, an actual seller on the spot market.

Graphics by Yogesh Kumar / Mint