The short-term power market is up for an eventful journey in FY18-FY20, says India Ratings and Research (Ind-Ra). However, the market is inhibited by impediments such as transmission constraints, opaque processes on open access within most states and steep cross-subsidy charges. A power supply-demand mismatch and a hiatus in long-term power purchase by states provide immense opportunities to the merchant market.
Ind-Ra expects utilities to increase the share of short-term purchases in the next three years gradually. Against a backdrop of diminishing power rates, discoms have unfettered access to the economical merchant market, apart from existing power purchase contracts. With spot prices hitting rock-bottom levels, discoms can reap benefits in the form of cost savings. However, capacity charges payable on long-term power contracts could be a drag on state utilities.
The Ind-Ra-rated portfolio of projects witnessed a depressed plant load factor level in FY17, though cash flows of such projects were reasonably insulated from volatility due to capacity charges payments. Developers with power purchase agreements (PPAs) that find spot market prices lucrative to enhance their returns could fiercely compete with other marginal players, if power is not scheduled by counterparties. Meanwhile, power producers that have not entered into PPAs will tap the merchant market, only when cost of generation (including fixed and variable cost) is lower than merchant rates.
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