Markets
Early summer spike heats up power sector stocks
Summary
The BSE Utilities index has risen 14%. Peak demand in March reached 14GW, driving prices to ₹10 per unit. Despite a widening price gap between solar and non-solar hours, companies are investing in energy storage projects.
The early onset of summer this year has put the spotlight on stocks of power generation companies, with the BSE Utilities index up about 14% over the past one month. Peak evening demand in the first 26 days of March at the India Energy Exchange (IEX) crossed 14GW against 8.5GW during the same period last year, as per its market data.
As a result, the peak hour price rose sharply to ₹10 per unit from ₹5.50 per unit last year. The March demand continues from the surge in February, when the average daily consumption rose by 7%, against a 3.4% increase recorded during the preceding three months, as per the Central Electricity Authority (CEA).
IEX is an electricity trading platform that helps in price discovery and meets any unanticipated surge in demand. The exchange accounts for 7-8% of total domestic power consumption, with most of the power sold through prior power purchase agreements between buyers and sellers at a fixed price.
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A dip in supplies from solar power in the evenings, coupled with an increase in residential consumption, has led to a significant demand-supply gap during the evening peak time. As per the CEA, peak demand is expected to reach 270 GW this summer, against 250 GW last year.
The surge comes as a boon for power generation companies, especially those with surplus capacities to be sold in the open market. Among them are JSW Energy Ltd, which has 28% of its thermal capacity available for sale as merchant power, and Torrent Power Ltd.
Stored power
Despite the increasing demand, there is a widening price differential in the power sector between solar and non-solar hours, the result of significant solar generation capacity addition. As per a JM Financial Institutional Securities Ltd report dated 25 March, solar capacity addition stood at 20.8 GW in FY25 till February, against 15 GW in FY24.
While the average price at the IEX has risen to ₹4.41 per unit during March, 13% higher year-on-year, the price during peak solar hours was 21% lower, at ₹2.54 per unit. This has prompted power sector companies to invest in battery and pumped hydro project (PHP) storage, which would help store power during non-peak hours for sale during peak hours.
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Among the projects initiated are 4.2 GWh projects by JSW Energy, 2 GWh by NTPC’s subsidiary, and a 1 GWh PHP by Tata Power.
“Declining battery prices are reshaping project configurations and are creating the potential for project economics to improve further," Motilal Oswal Financial Services said in a report dated 25 March. Battery prices have come down to $135 per kWh now from more than $200 per kWh in 2018, as per the report, improving the commercial viability of these projects.
Meanwhile, the share price of JSW Energy has risen by over 20% over the past one month, whereas PTC India Ltd and Torrent Power have gained 17% and 15%, respectively, reflecting the market opportunity.
The increase in price realisation backed by the spike in demand would determine the future movement of these stocks.
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