Power tariffs are on the rise – Is it seasonal or structural?
Barring the short-term reasons like imbalance in demand-supply, the underlying real demand is improving, which is far more important.
Jitendra Kumar GuptaMoneycontrol Research
While the recent spike in spot power rates to Rs 9 a unit could be short lived, the underlying trend is encouraging. Even if the average spot power tariff stays around Rs 3-3.5 a unit, it will still be 75 percent higher than the average levels of Rs 2.19 per unit seen in August last year. What is important is, at Rs 3-3.5 per unit, many power companies would be able to reduce their losses and could sa ee significant spurt in earnings.
How much of this sustainable?
It is often seen that short-term merchant tariff or spot power prices spike on the exchanges due to a sudden spurt in demand. Recently, when spot electricity prices hit a high of Rs 9 per unit, all fingers were pointing to lower supply because of reduction in generation, particularly wind and hydropower. That apart, the demand has been high, mainly in central India and north because of warm weather conditions.
In August, all India power demand grew at 6 percent including the states like Rajasthan that reported 37 percent year-on-year growth in peak demand. Nevertheless, the sudden spike in demand will cool down and supply from thermal sector will improve. For instance, in August, thermal power generation grew at 15 percent on a year-on-year basis and is expected to remain buoyant with large capacity being underutilised and issues of fuel like coal supply being sorted out.
During August 2017, India's thermal power recorded a plant load factor (PLF) of 58 percent as against 54.38 percent in July 2017 and 51.6 percent in the corresponding period last year. Effectively, the peak spot prices will ease, but they are expected to remain firm at a per unit rate of Rs 3-3.5 on an average basis.
What is driving?
Interestingly, barring the short term reasons like imbalance in demand-supply, the underlying real demand is improving, which is far more important. To put it in perspective, power demand has grown consistently from a growth of 2.7 percent in June to 5.3 percent in July and 6 percent in August. Power demand is improving post the initial impact of demonetisation on the industrial sectors.
Who will benefit?
Companies like JSW Energy that has close to 6000 MW of power generation capacity and derives close to 30 percent of its revenues from short-term power sales. Despite long-term contracts accounting for 70 percent of its portfolio, in Q1FY18, the company reported average realisation of Rs 3.49 per unit. JSW Energy's earnings are highly sensitive to power prices. Even a one rupee improvement in the overall realisation would mean an annual increase of Rs 2454 crore in sales based on annual generation of 2454 crore units. This is an incremental growth of 30 percent on FY17 sales. Moreover, theoretically, this additional sales after tax, which is about Rs 1717 crore would straight way add to company's profits, which stood at Rs 622 crore in FY17.Moneycontrol Research Page.