Spot prices of electricity, which have been surging of late, will continue to rise in the near term drivenby both structural and seasonal reasons.

These include unmet and suppressed demand, no new thermal capacities announced in the past 2years, and inability to meet peak demand because of mismatch with renewable energy generationcurve and insufficient domestic coal supplies. Moreover, plants stressed owing to ongoing litigation andchange in law provisions, are unable to run at full capacity, thereby adding to supply constraints.

The monthly market clearing price at the Indian Energy Exchange (IEX) has spiked ~25% from Rs 3.20per unit in January this year to Rs 3.97 in March, taking the average cost to Rs 3.43. That’s a hugeleap from the ~Rs 2.50 average logged in the corresponding period of the past two fiscals.

What’s more, monthly peak prices on power exchanges this year have averaged at Rs. 7.1 which isalmost twice the levels in fiscal 2017.

“We are staring at a huge problem because peak power deficit scenario is unlikely to improveanytime soon,” said Vivek Sharma, Senior Director, CRISIL Infrastructure Advisory. “To boot,demand will surge afresh given an additional 4 crore households will be electrified over 2018and 2019, and also because general elections and some state polls are imminent. Additionally,domestic coal supplies would come up short, which means continued dependence on importedcoal, the prices of which are expected to stay elevated. This will only push the marginal cost ofelectricity further up.”

However, the surge in demand will help power producers recover a part of their fixed costs, which hasbeen a challenge in the past. This is important because fixed costs are expected to rise following tighterenvironmental norms.

CRISIL’s assessment shows installation of flue gas desulphurisation systems and upgradation ofelectrostatic precipitators in both new and old thermal power plants would increase generation cost by~50 paise per unit.

Then there are additional costs because of construction delays, interest payments during theconstruction phase, and past losses from stranded capacities that can reflect in future prices.

On the other hand, as India focusses on installation of 175 GW of renewable energy by 2022, powerpurchase cost is expected to rise as solar modules becomes costlier following the levy of Goods andServices Tax, customs duty and potential levy of anti-dumping duty.

Also, charges levied owing to only ~25% utilisation of transmission lines by renewable energy sourceswill add to the cost of the grid. Rising penetration of renewable energy will also result in frequent cyclingand lower plant load factors at coal-based plants, thereby leading to higher variable cost.

Pranav Master, Director, CRISIL Infrastructure Advisory, “In light of a structural increase in spotpower prices over the medium term, it is imperative that discoms realign their powerprocurement strategies. Re-evaluating demand-supply projections, ensuring a balanced mix ofgeneration sources as well as medium-to-long term power purchase agreements (PPAs) would2be crucial to mitigate the spike in their power purchase cost that, in turn, could affect theirfinancial position.”