Coronavirus impact: Decline in merchant power prices to hit IPPs

The fall in prices of merchant power going following the rapid spread of coronavirus disease (Covid-19) is likely to impact Independent Power Producers (IPPs).

Spot prices of merchant power declined to as low as Rs 2 per unit during the Covid-19 lockdown, which was below the variable cost of power generation for most thermal power plants. As on April 13, average market clearing price (MCP) was at Rs 2.35 per unit.

“In view of muted demand, power plants continue to have higher inventory and will be in a position to declare higher plant availability which would allow them to recover fixed costs if they have two-part tariff (regulated tariff mechanism) long term power purchase agreements (PPAs) whereas merchant power from independent power producers (IPPs) are likely to be impacted due to absence of long-term PPAs with discoms and anticipated fall in spot prices which could make them highly susceptible”, a report by CARE Ratings noted.

The Covid-19 lockdown has brought all non-essential commercial activities across the country to a halt. As a result, the electricity demand from industrial and, commercial customers has fallen significantly, while the residential demand believed to have increased. According to the Central Electricity Authority (CEA), India’s electricity demand registered a mere growth of 0.26 per cent during FY20. Power demand increased to 1252.61 billion units (BU) during FY20 from 1249.33 BU during FY19. As a result of Covid-19 along with subdued demand from industrial states, extended monsoons, average Plant Load Factor (PLFs) of thermal power plants declined to 56.08 per cent for FY20 compared to 60.30 per cent for FY19. PLF for thermal power plants further declined to 52.55 per cent for March 2020 mainly on account of Covid-19 lockdown.

According to the Power System Operation Corporation of India (POSOCO), energy met was 2800 MU on April 11, 2020 compared to the average energy met of 3615 MU during February 2020 (pre-Covid-19), thus registering a decline of 22.54 per cent. CARE Ratings expects decline in PLFs of thermal power plants to below 53 per cent during FY21 on account of subdued demand from industrial and commercial segments and gradual ramp-up in economic activity post Covid-19 lockdown.

The study by CARE Ratings notes that reduction of letter of credit (LC) to 50 per cent of power purchase cost compared to 100 per cent power purchase cost is likely to provide some relief for generation companies and partial reduction of late payment surcharges (LPS) to 12 per cent from 18 per cent for bills delayed beyond 45 days, would continue to act as a deterrent to distribution companies (discoms) in delaying payments. However, due to poor collections by discoms, receivables of generation companies are likely to be stretched which would increase their working capital requirements in the short to medium term.