Merchant power developers in a spot as prices plummet

Discoms' reluctance to buy from exchanges, wheeling constraints add to woes.

Weighted Average Electricity Prices

	Power Exchanges (Rs/kWh)	Trading Licensees (Rs/kWh)
2010 (Jan-Sept)	4.19	5.26
2009	5.73	6.41
2008	7.57	7.04

(Source: Central Electricity Regulatory Commission data)

With electricity prices in the spot market on a steady downward spiral, the merchant power dream threatens to turn sour for private project developers.

From the highs of a couple of years ago, when weighted average tariffs were over Rs 7 per unit and peak tariff surged into the double digits, prices have come crashing to an average of Rs 4 on the two operational power exchanges for nine months (January to September 2010).

No ready money

Added to this is the reluctance among distribution utilities (Discoms), mostly cash-strapped SEBs, to buy electricity on the exchanges as they have to shell out ready money to do so. Also, the trend among Discoms to cut power in their semi-urban and rural areas, even when cheap power is available at ridiculously low tariffs on the exchanges, is adding to the worries of merchant power developers.

Wheeling constraints further compound the troubles for upcoming project, with the inter-State transmission system not keeping pace with generation.

Private sector players, including the Naveen Jindal Group, Videocon, the Adani Group and Indiabulls, are among those setting up merchant power capacities, where most of the power is meant to be sold in the spot market — either on the exchanges, through traders or through short-term bilateral pacts between utilities.

A total of 9,585 MW of capacity was added during the last fiscal, of which 4,287 MW or 45 per cent was by private developers, most of which had earmarked significant portions to be sold on the spot market. During the current fiscal, a capacity addition of around 14,000 MW looks likely, of which around 40 per cent could be private projects, again mostly merchant capacities.

Approaching danger zone

According to a senior CEA official, a serious situation is brewing in the power sector. “It is now fairly certain that by the middle of the Twelfth Plan (by 2014-15), the country should be in a comfortable situation in terms of generation capacity on the ground. The danger, however, is that Discoms have neither been financially restructured nor have they upgraded their distribution system. As a result, we are likely to have a situation where the generation has to be backed down and at the same time there is load shedding.”

Such a situation could have an adverse impact on the financial bankability of the sector at large, as there could be payment defaults by the IPPs (private projects), he said.

“Merchant power is fine as part of the overall portfolio for us, but we are going conservatively on it in light of pricing uncertainties,” a senior official with NTPC Ltd said.

During the current year, average tariffs of Rs 3.50 a unit in January gradually surged to a high of Rs 7.75 in April on the IEX, India's largest bourse. Since then it has headed downhill with supply much higher than demand. In September, the average tariff on the IEX was Rs 2.35 a unit.

Merchant power developers are, however, keeping a brave face.

“This year was an aberration in terms of excessive monsoon and the resultant dip in power demand, which caused the crash in prices. Demand is going to be in excess of supply,” an executive from a firm setting up merchant capacity said.