Buyers may shun long-term contracts and opt for renewables RE boom to lift power spot trading

A surge in renewable energy in India is set to massively increase spot power trading, according to the country's largest electricity bourse.

Buyers will increasingly turn away from traditional long-term contracts in favour of cheaper renewable energy, said Rohit Bajaj, head of business development at Indian Energy Exchange Ltd. More than a quarter of the nation's electricity could be purchased through spot deals within a couple years, quadruple the current level.

Coal dominates the country's power generation but that is changing, with renewables accounting for more than 80 per cent of new capacity last year, according to BloombergNEF. More variable generation from wind and solar means short-term trading will gain in importance--offering buyers the flexibility to switch to the most efficient sources and giving clean power access to states with less renewable capacity.

"Utilities are realising the value of flexibility and competitive price discovery on the exchanges," Bajaj said by telephone. National investment in power cables means "there are no longer any constraints in transmission, so why go for long-term contracts?"

Almost 90 per cent of India's electricity is traded via bilateral contracts that typically run for more than two decades between producers and state utilities. These take-or-pay contracts can be onerous for power retailers at times when cheaper renewable electricity is available.

The share of power under long-term contracts is expected to fall to between 50 per cent and 60 per cent by the middle of the decade, according to the country's Central Electricity Regulatory Commission.

Reducing the amount of power under long-term contracts means that producers and buyers can sidestep utilities, which are sometimes vulnerable to political moves by state governments that reduce their ability to pay generators, making supplies to consumers less reliable.

IEX is gearing up for the government's plan to optimise electricity prices by pooling various sources of supply on an exchange platform. The new system, to be introduced from April, will allow more cost-efficient power plants to produce more, reducing costs for buyers, Bajaj said.

IEX, one of India's two electricity exchanges, controls more than 95 per cent of the spot volumes. It's also planning to introduce contracts lasting as long as one year to tap buyers looking to secure future supplies, Bajaj said.

The growth prospects have fueled a rally in the stock. IEX's shares have surged 243 per cent this year.