Try short-term power trading
Optimising the procurement of power from short-term markets will help improve the finances of India’s ailing distribution companies
While India is expected to have its first-ever power surplus in 2016-17, with the overall energy surplus and peak surplus forecasted to be 1.1 per cent and 2.6 per cent respectively, the penetration of short-term markets in power remains low and calls for the attention of policymakers. Short-term markets refer to contracts with a duration of less than one year, and consist of bilateral contracts between a buyer and seller, and power trading on exchanges.
Compared with countries in Europe, where volumes traded on short-term markets range from 23 per cent to as much as 88 per cent as of 2015, shortterm power markets account for about 10 per cent of total power consumption in India (only three per cent traded over exchanges, with bilateral contracts and deviation settlement mechanism/unscheduled interchange accounting for five per cent and two per cent respectively). The majority of our generating capacity remains tied up in long-term contracts of 12-25 years (along with short-term intra-state transactions) which results in the entire demand-risk being transferred to the discoms, or power distribution companies.
Heavy reliance on long-term contracts has led to multiple issues faced by both discoms and generators. The state distribution companies are losing money due to the higher cost of power procurement in long-term contracts and much lower realisations owing to AT&C losses (aggregate technical and commercial losses) that include transmission losses, pilferage, and free power to agriculture. The total losses of discoms in India (adjusted for subsidy) as of 2014-15 were about ~58,275 crore.
This, in turn, has led to delayed payments to generators, idle capacities, stranded plants with no PPAs or power purchase agreements — and hence no means of achieving financial closure — and high tariffs for industrial customers, which affects their competitiveness and decreases their investments. Hence, while generating capacity has increased, only 49 per cent of this capacity is available at the time of peak demand.
Reforms in the distribution sector are, therefore, critical to improving the overall health of the power sector in India. The reforms can provide a fillip to key government initiatives such as “Make in India”. While government initiatives such as UDAY would address the immediate concerns of financial viability for discoms, we believe that the optimal use of short-term power markets is one of the alternatives that discoms in India should look at more closely.
Based on the limited data that we assessed, some of the long-term PPAs signed by discoms are fairly expensive relative to other options for power procurement offered by short-term markets such as exchanges. For instance, our preliminary analysis shows that Uttar Pradesh and Rajasthan, which were among the top three loss-making discoms in India as of 2014-15, could have saved anywhere from ~6001,200 crore in 2015-16 by surrendering power from plants with high variable costs and procuring the same quantum from competitively priced shortterm markets such as day ahead contracts.
Even after accounting for the premium a discom pays in a long-term contract with established supply and price, discoms have the option of stemming some of their losses by purchasing power more optimally. Provided some of these benefits are passed on to industry, this can be a significant contributor to reinvigorating manufacturing investments across states in the country.
With the advent of Open Access and power exchange platforms, some states have allowed Open Access to industrial consumers, along with intelligent power procurement from discoms by balancing long-term PPAs with short-term power procurement. As an example, in Haryana, where 14.2 per cent of all power is procured through shortterm power markets (compared with 7.4 per cent all-India), industrial GSDP growth has been a healthy 11.5 per cent and discom industrial revenues have grown by 24.6 per cent between 201213 and 2014-15.
Of course, there are still challenges to overcome, including the legacy contracts that need to be honoured and volatile prices in short-term markets. However, we believe that an opportunity exists for discoms to purchase a certain share of their power requirements on short-term markets, which can yield multiple benefits in the form of discom savings, as well as offering generators with idle capacity (e.g., merchant power plants and central generating stations which have recently used the exchange as an avenue to sell their unrequisitioned power) the opportunity to recover their variable costs.
Done right, there is an opportunity for states to significantly reduce state utility losses by optimis- ing procurement of power from short-term markets. This would go a long way in improving the financial status of our ailing discoms.