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MOSL: UTILITIES-DISCOMs getting more efficient in power purchase-Long-term PPAs at risk-Buy PWGR, NTPC

​UTILITIES: DISCOMs getting more efficient in power purchase; Long-term PPAs at risk; Buy PWGR, NTPC

• DEEP, a recently created electronic market for merchant power, has not only substituted bilateral transactions (thus weeding out corruption in power purchases), but has also helped states to reduce overall power purchase cost. States are sourcing peak load requirements rather than signing long-term PPAs where they have to incur fixed cost for full day. Our data analysis suggests that UP and Torrent DISCOMs are among the key beneficiaries.
  
• DEEP also provides a peek into the evolving demand-supply. As the share of renewable energy increases in the grid, the variability in conventional power generation will increase during a typical day. We expect DISCOMs to increasingly use merchant power to optimize power purchase costs and shy away from signing new long-term PPAs.
  
• The merchant market (e.g. DEEP) will also help in directing investment in connecting low cost power to demand centers and handling variability in load. Demand-side management tools like “time of day tariff” will evolve. We expect rates for peak demand hours to rise gradually, which will encourage better utilization of hydro and gas power.
  
• We continue to like regulated business models of PWGR and NTPC. We also like CESC for its strong distribution franchise and value unlocking through splitting into concentrated businesses. We also like JSW Energy for its ability to benefit from the stress in the power sector, given its strong balance sheet.