Electricity prices should remain stable in the next financial year given the higher demand: Crisil

Electricity prices are expected to remain stable next fiscal year due to increased demand growth of 5.5-6 percent, and demand is expected to close this fiscal year up 9.5-10 percent from 8.2 percent last fiscal year, it said in a report on Thursday.

Fear of a heatwave has sent short-term electricity prices skyrocketing by as much as 151 percent. This was due to a 42 percent year-on-year price increase in February, Crisil said in a report.

Demand growth would mark a decade-high growth rate, nearly doubling the 20-year average of 5.2 percent, the report added.

The report found that demand growth was 7.7 percent in February and averaged 10 percent for the 11 months of the current fiscal year despite a strong fiscal 2022 base due to extreme weather events and robust industrial and manufacturing activity.

March is unlikely to abate due to early warnings of possible heatwaves in the northern and central regions this summer, the report said.

According to Hetal Gandhi, a director at the agency, a hotter-than-usual summer with a high likelihood of multiple heat waves is expected to keep electricity demand up 5.5 to 6 percent in the next fiscal year, despite two years of robust growth. Even higher growth should be recorded in the first half of the year.

In power generation, non-hydro renewable sources are estimated at 11 percent this fiscal year, and their share is expected to increase by a notch next fiscal year, with solar and wind accounting for 13 percent. Hydropower now accounts for another 11 percent.

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But with limited storage capacity, thermal capacity will continue to bear the burden of meeting a sudden surge in demand, especially in the summer when water levels in hydroelectric projects drop. In fact, last summer hydropower’s share fell from an average of 11 percent for the full year to 8 percent.

Meanwhile, power plants using imported coal totaling 17 GW, or 8 percent of total thermal capacity, operated at a low plant load factor of 21 percent in February, massively lowering total plant thermal load factor of 63 cents. And nearly 97 percent of that imported capacity is owned by private actors, she said, adding that short-term electricity prices have risen sharply as a result.

In a bid to tame prices, the Department of Energy has launched a tender to buy 1.5 GW of imported coal-fired power plants with uncommitted capacity for a month (April 10-May 10).

Although a total of 8 GW of untied thermal capacity is available, the share of imported coal-fired power plants without short- and medium-term power purchase agreements in this untied capacity remains monitorable.

According to Surbhi Kaushal, a deputy director at the agency, the government intends to pump that entire 1.5 GW into the market in the short term to tame prices.

Imported coal-fired power plants will bid on fixed tariffs with a premium on variable charges indexed at Rs 5.34/kWh. This implies a 20 per cent mark-up on the variable fee of Rs.4.4 on an estimated Rs.7,500 per tonne of imported coal prices for Q1FY24.

The move comes in addition to the government’s move to invoke Section 11 of the Electricity Act, which requires all power plants using imported coal to operate at full capacity to allow for a better supply position.

Coal stocks remain at the plants at 12 days compared to 14 days in the last 35 months and all wheels are focused on getting coal shipments online. Structural steps such as accelerated coal-based rail transport projects are also being pushed ahead.

However, short-term markets have reacted. A surge in demand has meant that in the last 15 days, bids have exceeded ask bids in the short-term market by an average of 6 GW. The result is a price increase of 42 percent year-on-year in February and a price increase of 151 percent on the first day of March.

The clearing price on the Day Ahead Market (DAM) on the Indian Energy Exchange surpassed Rs 6.5/kWh in February, the highest level in the past eight months.

In 2022, the bid-offer bid differential started to turn positive in the first week of March, averaging over 3.5 GW. High prices forced the Central Electricity Regulatory Commission to step in and cut the price cap from Rs 20/kWh to Rs 12/kWh in April. Despite this, the positive difference from April to May 2022 averaged over 10 GW, pushing prices up to Rs 10/kWh on average over the period.

Crisil expects DAM prices to average Rs 6-6.5/kWh this fiscal year compared to an average of Rs 3.1/kWh in fiscal years 2015-19. Next year’s average price in DAM market is expected to remain below Rs 7-8/kWh, with almost non-operational gas-based power generation of 24 GW becoming competitive with falling gas prices.

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