BackPower utilities turn to cheaper exchange power as prices crash
When exchange-traded price falls below the variable component, discoms can save on their energy costs by foregoing power through PPA and buying on the exchange directly
PremiumKVN Chakradhar Babu joined the state-owned Transmission Corporation of Andhra Prdesh (APTransco) as Joint MD last June. At the time, APTransco had about ₹40,000 crore in loans, of which ₹25,000 crore was unpaid dues to power generators. The state government was also getting flak from the power industry at the time for forcing re-negotiations of high-cost power purchase agreements, a disagreement still mired in litigation.
Babu came to this scene and saw the spot power market (buying electricity through an energy exchange) as a good opportunity to reduce power procurement costs, a move state-owned distribution companies (discoms) have been reluctant to make. He brought a chartered accountant, a statistician and power system engineers to his team, assessed the state’s power requirements, the split between thermal and renewable sources, the existing power purchase agreements (PPAs), spot power price on the exchange and created a statistical model which could forecast how best to switch between spot purchases from a power exchange and power contracts to minimise procurement costs.
“On the exchange you have a pay for the power in advance, so you also need the liquidity buffer to support your purchases," Babu told Mint. “We’ve been doing this for 6-7 months at APTransco, and we managed to save ₹500 crore in FY20. We were well placed to maximise this benefit when spot prices fell on the exchange during the lockdown in March and April. We saved ₹56 crore and ₹132 crore in those two months. We were able to buy power for as low as ₹1.8 a unit at one point."
This shift towards energy trading is true for discoms across states. Typically, discoms sign two-part PPAs -- fixed and variable -- with thermal power generators. The fixed component of the tariff in the PPA has to be paid regardless of whether the discom procures power, and the variable component is paid only when the discom enforces the PPA and procures a certain quantity of power. The variable component covers the cost of fuel while the fixed component compensates the generator for the overheads of keeping the power plant running. For discoms, when the exchange-traded price falls below the variable component, they can save on their energy costs by foregoing power through the PPA and buying on the exchange directly. When the exchange price rises higher than the variable component, discoms can then return to procuring power under their PPA contracts.
In April, the first full month of the lockdown, national power demand crashed by 25% year-on-year. As thermal power plants kept running at their technical minimum ranges during the lockdown, the excess power they generated was routed into the exchange. At the Indian Energy Exchange (IEX), the total sell bids in the day-ahead market for the month were 2.3 times the buy bids. As supply increased, the average traded price touched a low ₹2.42 per unit, falling 25% year-on-year.
Power procurement by distribution utilities from southern, western and northern states such as Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Gujarat, Uttar Pradesh, Bihar and Punjab increased by over 10% in April on the IEX.
Satish Chavan, Director - Commercial, Maharashtra State Electricity Distribution Co Ltd (MSEDCL) told Mint that the state has also been active on the exchange through March and April. “We saw significant benefits from buying on the exchange in April but now in May the prices are back up. As long as the landed cost of exchange power is less than ₹3.10 per unit (the average variable cost of Maharashtra’s thermal power stations), we can save by buying through the exchange."
“States are now realising there is an opportunity by trading on the exchange and the replacement potential that exchange power provides," Rohit Bajaj, Head - Business, IEX, told Mint. “Discom participation on the exchange started to increase when the price stabilised at ₹2.50 a unit. At this level, thermal generators can recover part of their variable cost while discoms still benefit from the price being below the average variable cost on PPAs."
APTransco's Babu said that the state’s statistical models showed that power would remain cheap through April, so much so that it shut down 4700MW of Andhra Pradesh’s own 5000MW installed thermal power capacity during the month. “ Renewables and hydro have must-run status, and Andhra has the second largest installed renewable capacity in the country. So we depended on renewables and the exchange to meet the bulk of the state’s power needs and we used the savings to build a coal stockpile in April, since coal prices had fallen too."
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