KOLKATA: Demand for electricity hasn’t increased as expected, resulting in a surplus and prices falling so much that state distribution companies find it cheaper to buy power from the spot market than from generators with which they have long-term contracts.
This was exactly why the entire power offered at the India Energy Exchange on December 29 got sold, as claimed by power minister Piyush Goyal. The government’s aggressive power capacity addition plan and Coal India’s sustained efforts to supply adequate coal to all plants have added to the worry of generation companies with longterm power purchase agreements, such as NTPC, the country’s largest, and other central sector companies.
“Power prices at exchanges have declined about 25% over past three quarters and have been falling further primarily due to lack of demand,” a senior power sector official said. “During December last year, around 5 billion units were offered for sale. However, only about 3 billion units of power were sold – a gross oversupply of some 2 billion units.”
Increase in surplus generation capacity results in higher volumes offered in the spot market and lower prices, which benefit household and industrial consumers as state distribution companies pass on the benefit of cheap sourcing.
“It makes sense to buy cheap power from exchanges than pay for power that has been committed to us through agreements. Cheaper power enables us to supply larger volumes and yet be profitable,” a senior state distribution company official said.
Long-term contracts for supplying power consist of two parts – fixed and variable cost. The variable cost is paid when power is purchased, while the fixed component is paid irrespective of whether power is consumed as long as the plant is in a position of generate and supply 80% of its installed capacity.
“Even after paying fixed costs to thermal generators with long-term PPAs, utilities are finding it cheaper to buy power from exchanges. Cheap power is supplied mostly by independent power producers, primarily ones that do not have any power purchase agreement with state utilities. They produce power when demand spikes and idle plants in case demand falls. There are states that produce surplus power – the east and west and northeast. For them, selling it at exchanges is more profitable than idling their plants,” the official said.
With state electricity boards buying less from them, large generators such as NTPC and Damodar Valley Corporation are cutting capacity utilization, which will lead to reduced income.
The average market clearing price on the Indian Energy Exchange was Rs 2.56 per unit in December, a drop of 4% over the previous month. The spot market was cleared at a single price of Rs 2.3 per unit across India on December 29, after several years, the exchange said in a statement on January 6.