Long-term power deals inch up

Capacity utilisation to remain under pressure

After much delay, state electricity boards or SEBs have decided to execute their plans to buy long-term power. Jharkhand, Punjab and Maharashtra are looking to call for bids for power supply over 10-12 years. This would bring relief to generators like JSW Energy, Jindal Power and Essar Power which have been looking for such sale opportunities.

"SEBs have been delaying their plans to buy long-term power so we are selling at much shorter terms," said Sanjay Sagar, the chief executive officer of JSW Energy at its last quarterly results meet. The company sells around 50% of its power via merchant route.

Tying up power in long-term agreements would bring in stability to power generators, helping them keep their average power sales constant. "Now that state electricity boards have cleared the process of calling for tenders it would be a great positive for private sector power generators," said Rupesh Sankhe, power analyst at Angel Broking.

SEBs have been under pressure due to their own credit crunch. Unable to raise retail power rates, they had piled up huge loans. In the last one year, many sick SEBs have progressively increased rates, and are now able to buy power.

"Punjab and Haryana had earlier called for case 1 bids (long-term power contracts) to be contracted. But they were stuck at re-negotiations, and there had been a lull in the market. Now, with some of them opening up, it will bring some relief as there is huge demand for case 1 bids," said Umesh Agarwal, associate director of PricewaterhouseCoopers.

This is welcome change for the power sector which has been battling many issues including coal availability, for the last two years. Analysts, however, say the power demand in the market is still subdued as deficit gap between demand and supply is filling up, and is currently low, between 3-4%. This would mean that capacity utilisation or plant load factors (PLFs) of power plants will still remain low.

"Demand is not picking up and it will not until economic activity increases and so does the rate of growth. Though some issues related to fuel supply has been solved, and though power plants will be able to produce more," said  Agarwal.