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MOSL: UTILITIES-Improving dd-ss situation driving merchant prices higher

Utilities: Improving dd-ss situation driving merchant prices higher; Visibility improving for long-term PPAs; JSPL key beneficiary

Short-term electricity prices remain strong

Over the past four months, volumes are down by ~6% YoY in the short-term market on the DEEP platform (Exhibit 1). However, prices have increased by ~30% YoY to INR5.7/kWh over the same period (Exhibit 2). We note that prices have increased, despite an improvement in the coal supply/stock situation compared to the previous year (Exhibit 3) and normal operations at Adani’s Mundra power plant, which was shut last year taking out ~4GW of supply (Exhibit 4). These two factors had contributed to a 60% YoY increase in volumes and ~30% YoY increase in prices (to INR4.47/kWh) on the DEEP platform over the same period last year.

 

Higher price discovered in recent medium-term PPA

A price of INR4.41/kWh was discovered in Pilot Scheme-II, an increase from INR4.24/kWh in the Pilot Scheme-I (Exhibit 5). Pilot Scheme is run under the support of the central government to provide three-year medium-term PPAs to merchant power plants. While the increase in prices appears small, it is noteworthy in context of the favorable terms for generator under Scheme-II. Under Scheme-I, the fixed charge was just INR0.1/kWh versus INR2.2/kWh in Scheme-II, there was no provision for escalation in tariff and the assured off-take was only 55%. DISCOMs have still to agree to PPAs in Scheme-II, but the higher price – despite the favorable terms for generator – is an indicator that prices are settling at higher levels. 

 

Improving demand-supply situation driving price increase

We believe, as we have argued in the earlier notes (), the increase in short-term electricity prices is driven by the improvement in the demand-supply scenario. The conventional capacity add has fallen from peak of ~23-24GW per annum over FY13-16 to just ~6GW in FY19 (Exhibit 6). Retirement of old plants is continuing at ~2-3GW per annum (Exhibit 7). Net conventional capacity add was the lowest since FY09 at 3.5GW in FY19. Thus, despite conventional generation (read, demand) increasing by just 3.6% in FY19, the lowest since FY09, demand still outpaced capacity addition. FY19 was the second consecutive year when conventional generation has outpaced capacity addition. We believe the trend would continue and PLF of coal-based plants will increase from ~59% in FY19 to ~65% in FY22 (Exhibit 8).