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As India’s renewable energy strategy unfolds, the thermal power sector’s stable long-term power purchasing agreements, or PPAs, are coming under threat.

 

Data compiled by Religare Capital Markets Ltd shows that long-term PPAs, spanning more than 25 years, were all signed by solar power firms in 2015-16 and in the first quarter of the current fiscal year. Thermal or coal-based plants were given only short- to medium-term contracts. That is a remarkable change for the sector, which currently constitutes almost 70% of India’s installed capacity.

 

A combination of factors is at work. The central government’s push for renewable energy capacity addition and the states’ obligation to include solar in their energy basket is driving long-term contracts to solar. For these projects to be viable at competitive rates, they require the certainty of long-term contracts. Otherwise state power distribution companies (discoms), given their weak financial position, would be less inclined to buy relatively expensive solar power (compared with thermal), said a Religare Capital analyst. Even then, if discoms were to plan their peak load requirement, 25 states may need to sign 39,000 megawatts of PPAs by 2019-20, pointed out Motilal Oswal Securities Ltd.

 

But as Motilal Oswal said, this may not happen as states are meeting the demand through merchant or short-term power markets, which are offering electricity at competitive rates.

 

“Merchant prices for electricity have been under pressure on account of declining coal prices and increased competition. This has discouraged the struggling discoms from entering into long-term PPAs that carry higher power tariffs,” Religare Capital said in a note.

 

The average market clearing price at India Energy Exchange (IEX) has fallen 30% from 2014 to Rs.2.50 per unit in the first six months of 2016, whereas thermal PPAs are being signed at about Rs.4 per unit. “Compared to one or two years back, almost all states’ discoms are buying to meet their contingent peak requirement. Few states like Bihar, Delhi, etc. are purchasing through exchange platform to economize on power costs by even backing down their costlier PPA power,” said Rajesh K. Mediratta, director at IEX.

 

Of course, the relatively smaller scale of renewable power right now means that thermal remains the key electricity source for India. Also, power markets are still evolving. Some regions continue to face transmission constraints, necessitating bilateral contracts (between states and generators).

 

But increasing adoption of renewable power, strengthening power markets and growing preference for competitively bid merchant contracts mean the thermal power industry can no longer have the luxury of stable long-term PPAs. That undermines the defensive quality of the sector for investors.

Source: Livemint.com