Editorial April 2018

One of the key trends observed in the power sector last month was the spurt in spot market prices. According to data from the IEX, the average market clearing price (discovered in the day-ahead market) at Rs 4.02 per unit was 24 per cent higher than that in February 2018 and 57 per cent more than the Rs 2.56 per unit registered in the same month last year. This is the second instance of a spurt in prices after they had climbed to Rs 4.11 per unit in September 2017 (touching almost Rs 9.90 per unit in one time interval).

While earlier the key reasons for the uptick in prices were supply-side issues due to a reduction in hydro and nuclear-based generation, this time, the reasons have been the early onset of summer and lower coal supply to thermal power stations.

The rise in prices has been building up in the past few months, with the average market clearing price from December to February on the IEX rising 27-29 per cent from a year ago. Experts note that prices are expected to increase further with the summer and with coal supplies expected to remain tight over the next couple of years (thereafter, new railway links could help ease the situation).

Industry observers say that spot prices are a good indicator of the power demand-supply situation and the rock-bottom levels of power prices in the past couple of years have been indicative of an excess supply situation. Now, with power demand increasing, new capacity additions slowing down and existing capacities facing coal shortages, excess capacity is expected to get absorbed and the surplus power situation may not exist for long.

Net, net, the key takeaway for discoms looking at these trends is to rework their power procurement plans. So far, prices in the short-term market kept the long-term procurement processes in abeyance from the states. However, with discoms facing immense pressure to maintain financial discipline, power procurement costs, which are rising for discoms, will need to be managed and discoms will need to re-consider signing more PPAs. This should bring in some much-needed relief for IPPs as well.

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