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MOSL: UTILITIES (THEMATIC)-Power oversupply has started shrinking; Merchant prices to rise, New PPAs to emerge soon

Utilities (Thematic): Power oversupply has started shrinking; Merchant prices to rise, New PPAs to emerge soon; JSPL key beneficiary

 

Indian power oversupply has started correcting on tapering of capacity addition and accelerated retirements. PLF has started improving after seven years of descend. Although India has achieved peak PLF of 63% for conventional power generation in FY10, we expect next peak PLF to be much lower around 56% in FY22E due to displacement by renewable energy. We expect market to balance in three-to-four years unless there is a major breakthrough in storage technology. As new investments have dried up and it takes 3-5 years to build new brownfield capacities, we will move from overcapacity today to shortage in three to four years. As we move towards market balance, margins in merchant power business will trend up. This will benefit many stressed assets, but the biggest gain in equity value is likely to accrue to Jindal steel and Power, in our view.

 PLF has started improving after seven years of descent

Conventional generation PLF improved for the first time in many years on tapering of new capacity addition and increase in retirement. All-India PLF (ex-RE) increased ~50bp and coal-based PLF increased ~80bp in FY18. Based on our revised demand-supply model, PLFs will improve further over the next 3-4 years. We expect net conventional capacity addition of only ~20GW against demand growth of more than 37GW over FY19-22. Demand is now outpacing capacity addition after seven years. We expect demand to grow at ~6% CAGR, similar to the last 5/10-year average. Improvement in industrial activity, deceleration of energy efficiencies, and 24x7 schemes can push demand higher.

 Merchant capacity addition has dried-up; new PPA supply could be delayed

Only ~2GW of merchant capacity addition is expected over FY19-22. These too have financial issues. The remaining addition is by NTPC and State Genco. Past track record suggests there could be delays in these projects.