Low prices of imported coal may allow these plants to be reasonably competitive at the generation cost (excluding return on equity) of about INR3.6/unit and if they are located near the coastal region. However, stranded generation from these plants for a year may be as high as 37 billion units (BU) compared with the total traded short-term volume of about 99BU in FY15.
India's total coal-based power plant capacity was 167,207MW at end-June 2015 and 8.3% (13,900MW) of the total capacity was added from April 2014-June 2015. Of the newly commissioned plants, the capacity of 40% of the plants is under strain and 37BU of generation may be foregone annually, unless sold through short-term markets. While 70% of the power is tied up through long-term/medium-term off-take agreements, about 1,300MW of the tied-up power encounters transmission constraints. Transmission constraint means that electricity cannot be transmitted from the location where it is generated to the location where the demand exists.
The weighted average price of electricity transacted through power exchanges is INR2.5/unit and INR2.35/unit in Power Exchange India Limited and Indian Energy Exchange, respectively (CERC, May 2015). Any further protraction of the subdued short-term rates could exacerbate these losses.
Ailing finances, expectation of a high bid price (based on case 1 bidding pattern) and prevailing short-term tariffs preclude many state utilities from cobbling long-term contracts. With over 5,500MW of capacity lined up for commissioning in FY16, there is increased uncertainty of timely debt service for these projects in the absence of a strong off-take agreements/evacuation capacity.
The power demand and supply situation is constrained by the lack of adequate inter-regional transmission capacity. Consequently, surplus power from the eastern and the western regions is unable to cater to the demands of the northern and southern regions. The seemingly lower power deficit position, contributed partly by load shedding, although could be short term, intensifies the stress on operating environment for these projects. Despite riding over the difficult construction period including overcoming land issues and delayed fund injections, the power projects are struggling to transition into the next stage of the project life cycle.
In the backdrop of trickling power purchase agreements with state utilities, power owners face a behemoth task of selling the untied capacity in the short-term markets. Historical power trading volumes highlight a gradual increase in power sales through short-term transactions. Short-term trade volumes had increased to 10.87% of the electricity generated in FY14 from 8.63% in FY10. However, the total traded short-term volume dipped to about 99BU in FY15 from 104.64BU. Ind-Ra expects an addition of minimum 11% to the short-term energy market in FY16 from these commissioned power plants, if the plant owners decide to generate power. This growth is reminiscent to the pre-FY13 rate. Hence, the volume of short-term trade would inch up beyond 12% of the total power generated. Given the surplus capacity hitting the short-term market, the spot market rates could slide further down.
Increased focus on the transmission sector rather than award of projects through competitive bidding for inter-state infrastructure could have some salutary effect on the power sector. Additionally, the power sector will stabilise over the longer term. We believe the consolidation in the sector will continue.
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