State of Indian power sector where we are heading??

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There has been a significant capacity addition of about 54 GW during 11th five year plan and government plans to add about 70-88 GW in the 12th five year plan. This is the first time the country has added significant amount of electricity capacity and achieved over 80% target during 11th five year plan for new capacity addition. The new capacity has impacted the electricity prices and the power exchange data shows a declining trend. This declining trend in electricity prices is because in recent years the electricity is being traded through exchanges as well as through bilateral trades, the prices of electricity also reflect effect that during peak power requirement many utilities adopt load shedding rather than by buying the costlier power from the grid, this is not a healthy sign as about 20000 MW of gas power capacity (costlier power) will remain stranded. On one side this power plants face significant gas shortage and the recent hike in gas prices has also led the viability of their generation in question mark.

Electricity prices in India are artificially governed by political interventions and as the electricity is sold at a price below a purchase price of power companies many of these companies are not in favour of buying the costlier power. The country also has 25-30GW diesel generating capacity which will cost about 15-20Rs/kwh and it is unviable to buy these costlier power by many power companies.

Looking at the electricity price trend, the electricity prices in northern grid (NEW) are higher. However due to lack of transmission capacity it is difficult to take these power to southern grid and shortage of power in southern grid reflects relatively high electricity prices in southern grid compared to northern grid.

Graph of the Day

This is not a healthy sign for the industry as the power sector making attractive five years back, today many IPPs have deferred their plan for investing in these industries. On one side the developers are facing the challenges of high imported coal prices, shortages of domestic coal/gas, on other hand the introduction of competitive bidding has brought down the power tariff prices significantly and developers are facing challenges for arranging financial closure of their projects. In fact many financial institutions have become cautious in financing the power projects for renewables. This is the very negative signal to Indian power sector on one side we have stranded generation capacity on other side we have shortage of fuel. In fact the lack of transmission facilities in the country made some large UMPPs (Ultra Mega Power Plants) address as there is a need to invest in better transmission facilities to evacuate power from these power plants. The electricity price trends in India are cyclic in nature, whenever there is an election the electricity is purchased at high cost in order to keep the vote bank active, for example in 2011 the electricity prices in Tamil Nadu as high as 11 Rs/unit due to government mandate to the utilities at high price they can. The falling trends in investments in power sector also stalled the growth of the renewables in country. Already government has withdrawn physical benefits such as AD from wind power projects at the same time the market is moving from FIT to the competitive tariff and we have witnessed that now you can buy electricity from solar power projects at a price of 6 Rs /KwH. The investments are also following down trend because the bankability of PPAs signed by state power utilities is on question mark. Most of the state utilities are already in threat and in last year these utilities has recorded losses of rupees 700 million. The investors are not comfortable on the PPAs signed with these state power utilities which are already in threat.

Graph of the Day

There is an urgent need to divide these sector and politicians have to realize that electricity is a commodity which cannot be sold at price below the procurement price of the state utilities. Some of the state utilities have shown sign of improvement for example in Delhi , the electricity utilities have done better as power is being supplied at a price which leads to reasonable profit to state power utilities. We believe that investment in power sector cannot become down, if government can give clarity in terms of their pricing strategies, power offtakes, payment securities and unconstrained grid electricity. We believe that government may not achieve the desired targets in the 12th five year plan.

By,

Sanjay Vashishtha

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