Home Market Short-term power prices may remain rangebound: Ind-Ra

Short-term power prices may remain rangebound: Ind-Ra

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KOLKATA: India Ratings predicts short term power prices to hover between Rs 3.75 per unit and Rs 4.25 per unit during 2018-19.

According to its analysis short term power prices would be a factor of increased costs of generation due to increased dependence of imported or coal procured through e-auctions since energy demand is likely to grow at a healthy pace, while incremental coal output could not increase at necessary rate requiring part of the incremental demand to be met by imported coal.

“Thus, in light of expected high imported coal prices, short-term power prices in India would continue to be in the range of INR3.75/kWh to INR4.25/kWh over FY19,” a India Ratings research report predicted.

In the recent past the analysis firm has predicted high possibility of electricity demand growing by 6%-7% in 2018-19. Continued reliance on thermal-based capacity coupled with slower-than-required growth in domestic coal output and increased reliance on imported coal, would play a key role in determining the short-term power prices.

Over the last few months, imported coal prices have seen a sharp increase and touched $100 per tonne and Fitch Ratings expects international coal prices to stay at higher levels.

A recent Fitch Ratings report suggest that rising regional demand and falling mining investments partly reflect the tighter environmental policies at banks. A prolonged industry downturn from 2013 to 2016 has dampened mining firms appetite for investments, particularly in low-margin ventures, while growing environmental concerns are affecting their funding options.

Banks' increasing reluctance to fund fossil-fuel projects is likely to be a constraint on any recovery in coal investment. Regional supply could also be held back by policies in Indonesia – the world's biggest coal exporter – that will limit the amount of coal that leaves the country, as the government looks to meet growing domestic power demand.

These policies have not had much impact on coal exports in recent years, as domestic demand failed to meet the government's expectation due to completion delays in power projects, but export curbs could start to bite as the state power company Perusahaan Listrik Negara and independent power producers add coal-fired capacity over the medium term.

India Ratings analysts said that the rising imported coal prices have resulted in an increase in the variable cost of generation, added to this has been a currency depreciation which added to the rise in generation costs.

From the lows of $50 per tonne in 2016 it has risen doubled to $ 100 per tonne while the currency has depreciated from Rs 65.9 to Rs 66.9. This has resulted in aariable cost of generation from imported coal rise from Rs 1.86 per unit in the second quarter of 2016-17 to Rs 3.43 per unit in the first quarter of 2018-19.

Even at higher merchant tariffs of Rs 4 per unit, the gross margins earned by independent power producers are lower as the variable cost of generation has gone up. Though the gross margins are low, but given that most of the coast-based plants generally continue to generate energy till the time they make a positive gross contribution, these plants could see an improvement in plant load factors.

However, operations of inland-based plants based on imported coal could pose a challenge as their variable cost of generation would increase further due to inland transportation costs, thus making operations unviable. These plants might not see an increase in plant load factors even in a scenario of higher exchange prices.

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