Circa 2015/2017, some 5-7 years from today a newspaper headline says – The CERC (Electricity regulator) imposes a Rs 1 rupee floor on the rate of traded power. The supply of power in the spot market far exceeds demand. A majority of new merchant power plants operate at below marginal cost. The cost of power in India falls to the lowest in the world due to intense competition.

Sounds unrealistic, not to me. ‘

Like the price competition which has grasped the Telecom industry around 6-7 years after it was perceived to be a sunrise industry due to increasing competition and new entrants, a similar phenomenon is likely to repeat in the power sector around 5-7 years from today. The reasons for these are obvious,looking at the short term power rates of Rs 10-14 per unit and cost recovery of power plants based on the cost of power generation and the current merchant power rates each and every industrialist today is looking to get into the power sector. CERC has had to impose a cap on short term power rates in order to prevent short term traded power rates going out of hand.

Lets look at some some statistics. India’s installed power base today is around 1,50,000 out of which around 80% would be available capacity, as such electricity consumption should be in the region of 1,10,000 MW. The total addition of power capacity over the last 5 years has not been more than 20,000 MW. As against this the power capacity addition over the next 5-7 years would be over 150,000 MW. A broad composition of the same could be –

NTPC -30,000 MW

NHPC 10,000 MW

SEB’s 25,000 MW

Reliance Power 20,000 MW

Tata Power 10,000 MW

JSW Energy 10,000 MW

Jindal Steel & Power 10,000 MW

Sterlite Power 10,000 MW

Adani Power 10,000 MW

GMR 10,000 MW

GVK 10,000 MW

Lanco Infra 10,000 MW

Indiabulls Power 6000 MW

Adani Power 10,000 MW

Other smaller players like Torrent Power, CESC, NLC etc. combined 10,000 MW

Wind Power 15,000 MW

And a number of other players who are getting into the game all the time.

(I do not profess to know the exact capacities being added by these companies but this is just a broad illustration)

And so on and so forth. With a huge amount of capacity coming on stream over a period of 2-3 years Merchant power rates are expected to crash. Power availability will go up and cost will come down. This will be extremely positive from the economies point of view. However it runs the risk of exposing the banking sector to high NPA’s from this sector as Power Plants are getting Financial Closures very easily these days based on rosy projections of price of power sold and expected profits from the same. The total investment going into setting up power plants by the private sector is likely to be in the region of USD 100 BILLION over the next 5-7 years.
Also given the acute shortage of power in India today with a large part of the country having to go with 6-8 hours of power cuts every day a number of companies are today looking at adding their own captive power plants, this is likely to further add to capacity. It will be difficult for the cost of power production to go below Rs 2 per unit. As such cost recovery will become an issue for a large number of new power plants. Given the huge fixed costs involved in setting up power plants most of these plants will be forced to run on marginal costing just to cover their fixed costs.
As such investing in the power generating sector in India with a view towards a few years into the future is froth with danger. The ROCE for most of these projects is unlikely to go into double digits.

“Sometime your best investments are the ones that you do not make”

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