Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

What the low electricity price in spot market tells us about power demand

  • The reduction in coal prices in the global markets and improvement in fuel supplies did help lower electricity prices
  • The drop in electricity generation underscores weak demand conditions, reflective in slowing automobile sales and production cuts at manufacturing plants

As thermal power plants go offline for maintenance work during the monsoon months, electricity prices in the spot markets generally perk up. Prices were at their highest in September and October of 2017 and 2018. But the scenario is notably different this year.

Prices so far this month on the Indian Energy Exchange has been the lowest for 2019. Electricity prices are lower despite a significantly large amount of thermal capacities seeing maintenance shutdowns. As on 17 September, 90,095 megawatts (MW) are under maintenance shutdowns, data from Central Electricity Authority of India shows. Last year, 72,193MW of capacity was under maintenance shutdowns during this time.

The reduction in coal prices in the international markets and improvement in fuel supplies from domestic sources did help lower prices. This is reflected in an improvement in coal inventory at power plants. As on 18 September, thermal power plants, on an average, had fuel equivalent to 11 days of requirement. Last year, power plants had coal inventory of less than seven days.

Still, low fuel prices and availability alone do not explain the subdued electricity prices in the spot market. The larger answer lies in the demand scenario, which has seen a noticeable slowdown. Total electricity generation, which mimics demand, dropped 0.3% last month. Thermal power generation fell 3.5%.

Thermal power generation, which meets most of India’s electricity needs, grew 3% in the five months to August. This is slower than 4-8% expansion it had clocked in the April-August period of last three years.

The drop in electricity generation underscores weak demand conditions, reflective in slowing automobile sales and production cuts at manufacturing plants. India Ratings and Research said in a note that electricity demand growth in states with higher manufacturing base is notably lower than the overall demand growth in India.

The corporate tax cut by the government and the upcoming festive season can perk up consumer sentiment, helping electricity demand. Also, the central government’s efforts to improve availability of electricity through expansion of the coverage network and reduction in power outages should help. Even then, for a sustained demand recovery, off-take from commercial and industrial sectors, large users of electricity, has to pick up.

It’s also crucial that the central government’s efforts to enforce distribution and revenue collection discipline among state power distribution companies (discoms) are successful. Continuing losses at discoms are hampering payments to electricity generators. This can weigh on the power purchase cycle if corrective measures are not enforced.

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