Electricity generation growth in May highest in many years

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The Reserve Bank of India’s monetary policy statement mentions as a negative factor that “the output of eight core industries decelerated sharply in April on account of contraction in coal, crude oil and cement due to structural constraints and low demand. Furthermore, electricity generation decelerated due to depressed demand pricing out relatively expensive thermal output”.

Well, as far as electricity production is concerned, things have changed markedly in May.

Electricity production, which remained subdued in April, picked up in May. Generation increased by 7.2% from a year ago, the best growth seen in the month in at least five years. The growth reflects the increased demand during the summer season.

As procurements by the power distribution companies rose, volumes in the spot power market at the Indian Energy Exchange hit record levels last month. Prices in the spot electricity market, which were in a downtrend, have risen compared to both April and from May 2016.

The improvement in prices should provide respite to companies that sell electricity in the merchant power markets. The benefit, however, will be contingent on sustainability of the generation momentum. Due to subdued growth in April, power generation so far this fiscal year (April plus May) is up only 5.5%. The generation figures exclude renewable energy.

Even then, if the onset of monsoon rains and reduction in temperatures slows down generation growth, the recent increase in electricity production can only have a fleeting impact on the generation companies’ financial performances. Average utilization levels remain low even as generation capacities continue to expand.