Ind-Ra: Short term power prices to remain high

Owing to the likelihood of an increase in power demand (FY19: 6.0%-7.0%) and other factors, short-term power prices would remain range-bound at INR3.75-4.25/kWh in FY19 (FY18: INR3.25/kWh), according to India Ratings and Research (Ind-Ra).

Ind-Ra believes that in the event of rising demand and lack of domestic coal availability, imported coal usage could increase in India. This is likely to determine the marginal cost of electricity production and, thus, could keep short-term power prices high.

Rising Demand for Power

All-India energy demand increased at a CAGR of 4.9% over FY13-FY18, with the industrial and commercial segments representing nearly 50.0% of the power demand. The growth in the agriculture, industrial and domestic segments is related to the growth in levels of villages electrified/electric pumpsets used, the index of industrial production (IIP) and net national income, respectively. Thus, the overall demand for electricity could grow 6.0%-7.0% in FY19.

 

Growth in Consumption from Domestic Segment

Domestic consumption registered healthy growth over FY13-FY17, driven by a significant increase in net income per capita. In addition, higher income, more usage of air-conditioning devices, higher number of electrical devices per household and better standard of living contributed to the healthy growth in electricity consumption. Empirical evidence globally suggests that income elasticity ranges between 0.8-1.2 at present. This essentially means a 1.0% change in national income per capita would lead to a 1.0% increase in residential demand.

Air-conditioning system penetration among households in the US stands at about 87.0%, which is significantly higher than about 4.0% for India. Ind-Ra expects the Indian market for air conditioners to annually grow at 10.0%-15.0% in the medium term. With an increase in temperatures, the number of air conditioners per household and the usage duration of ACs could increase. Moreover, higher electrical appliances per household, driven by rising income levels, could result in an 8.0% increase in power consumption by households.

Growth in Consumption from Agriculture Segment

The annual growth in agricultural consumption of power was volatile at 3.0%-13.0% over FY13-FY18. Meanwhile, the consumption increased at a CAGR of 6.75% during the period. Ind-Ra expects similar level of growth in agricultural consumption in view of the rural electrification drive and the higher proportion of electric pumps compared with diesel pumps used in agriculture.

Given the agriculture, industrial and domestic segments are likely to grow at a healthy pace, the overall demand growth will revive to 6.0%-7.0% in FY19.

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