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Table of Contents
Capacity additions and supply
Supply glut to weigh down power sector in the medium term; revival remains distant
Although several measures have been initiated by the government, robust pick-up in power demand is crucial for revival of the stressed generation segment. As of 2019, major distribution companies (discoms) had already tied up for excessive power procurement through long-term PPAs to meet their respective demand. The overall power procurement structure is also expected to undergo a shift and discoms are likely to prefer short/ medium-term procurement instead of long-term PPAs on account of increasing share of intermittent renewable energy and rise in industrial open access consumption. As discoms are avoiding tying up for excessive capacities under such uncertain sales growth projections, negligible fresh PPAs for conventional power are expected till fiscal 2022, leading to continued financial stress on generators with untied capacities.
In April 2018, Power Ministry introduced scheme for procurement of aggregated power of 2,500 MW for three years (covered under medium term) through PFC consulting Ltd as nodal agency. In its first phase aggregator signed medium term PPAs for procurement of 1,900 MW power from private developers at discovered tariff of Rs 4.24 per kWh and back-to-back power purchase agreements with discoms. Recently, government concluded second round of the scheme for 2,500 MW with discovered tariff of Rs 4.41 per kWh providing some respite to the plants who signed PPAs under the scheme.
Sale of power through the merchant route is also an unsustainable option owing to continued decline of short-term power prices, which, after firming up during the first quarter, stood at Rs 4.18 per kWh on average in fiscal 2019 (weighted average prices of power transacted on exchanges and bilateral transactions through traders). Prices are expected to remain low at Rs 3.4 - 3.7 per kWh over the medium term.
Low tariffs in exchanges can only cover fuel cost, thus limiting any possibility of revenue generation for untied capacities. Consequently, consolidation in the sector is expected to be slow and takeover of stressed assets will be limited to the extent of tied-up capacities as witnessed in the recent past.