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The major issues affecting power sector & power trading....- Mr M N Ravi Shankar, Director, National Energy Trading Services Pvt. Limited


The Indian power sector is going under a stressful period with pressure on both generators and distribution companies building up. In such a scenario the power trading business is stuck in a catch 22 situation. National Energy Trading Services Ltd (NETS) is one of the largest power traders in the country. In a dialogue with NETS Director, Shri M.N. Ravi Shankar, answers to some of the major issues affecting power sector are discussed. Excerpts-

Q1. What are your views on the current turbulence in the power sector? Has it made the power business unviable?

"The current crisis situation in the power sector can be attributed mainly due to two factors viz. the prevailing situation of fuel supply scenario and the increasingly weak health of distribution utilities across the country. Both these aspects are mutually co-existing, which have a serious impact on the power sector as a whole."

Looking at fuel shortage in terms of both coal and gas based projects, a substantial part of the sector is under threat with their increasingly non-availability. Coal being the mainstay of the Indian power sector has seen a serious shortfall in production with CIL unable to supply the agreed supply and to further the problem MoEF’s policy level changes for the mines had partly affected the production cycles too. Similarly, gas supply has taken a hit with the Centre unable to provide any alternative to the decreasing production from RIL’s KG-D6 gas basin, either by policy direction or to future of gas based power plants.

If the government is unable to provide both the fuels to commissioned and upcoming power projects it would have a serious impact on the capacity addition programme in future, as it would be affecting the investor confidence. Further, this heightens the chances of projects being stranded and defaulting on bankers, putting the financial sector in a probable crisis.

However, if the government does manage to provide coal to 12th plan power projects, there can be a situation of near-zero-deficit in the economy, eventually but with an increased cost. If the end (Retail) tariffs are not increased accordingly then governments’ will have to bear an increased subsidy burden, along with an increase in losses for generators, thereby making power an unattractive sector.

Q2. Generally gas based plants are used to meet the peak load, however, in India that is not the case. What is your view on the current trend of gas based plants as base load and the impact on trading?

In India approximately 50-60 billion units of power are traded while 8000 MW of capacity is on merchant basis. The short term market impact of the current volatility in the system will lead to the entry and exit of many players. However, in the long term, looking at the current situation only serious players with deep pockets will only survive in the market, both for merchant and otherwise.

"Globally it is preferred to have gas based plants running as peak load. However, this is not the case in India, where gas based plants are running on base load as there is no peak-load contracts available in India, further, contract that the developers sign with ONGC, RIL, others are not on Take and Pay basis but on Take or Pay and are long-term based contracts. Till the time the contract mechanism is not changed or adequate storage facilities are developed, gas will be taken as a base load fuel."

On similar lines, the market should change as well. There is a mismatch in the peak and off-peak prices. Ideally the peak prices should be Rs. 9-15 (depending upon the fuel being used) and off-peak should be Rs. 2-3 per unit, so as to have an average realisation of Rs. 3-4 per unit. In India, nearly 6 hours in the day account for peak hours and in this time the developer can sell the power at a higher price of Rs. 15 per unit and for the balance a lower amount of Rs. 2.

It has become a water-tight situation for the traders, as coal based plants are unable to meet the peak load requirements as it becomes difficult for ramping (Up/Down) the capacity frequently based on hourly usage to match the capacity changes. In trading the contract time is of 15 minutes and the volume of power traded varies accordingly. At times States and Developers take the shield of UI to tide over the issue of power imbalance but on an average there is a lowering down of PLF. There are few mismatches in the regulations governing various aspects of power.  

Q3. Continuing on this, what are the immediate changes that can be done to help participants overcome or balance out these loopholes?

"I think that to compensate the traders, the margin requirement should be done away with. On selling power for Rs. 4 a trader get 7 paise as margin. This means that a trader is taking a risk of atleast 60 times of what he is earning, which is unjustified. Also if the trader is unable to sell the power contracted there will be a penalty imposed too (say Rs 2 it amounts to 30 times the trading margin)."

In recent times States in the country are adopting new mechanisms which increase the risk of traders. For e.g. recently Tamil Nadu adopted a new mechanism for computing compensation for short supply, which was previously computing the penalties for any shortfall on a monthly basis for traded power; has now shifted to calculating the same on a daily basis with a minimum supply requirement of 90 percent. Any deviation on the negative side from the 90 percent target will attract a penalty of Rs. 5 / kWh. This means an increased risk for trader. A trader will normally look forward to mitigating the impact of the penalty imposed by passing on the same to the generator, but looking at the current scenario, no generator will be willing to accept such risks. If all other States start following a similar mechanism, serious issues will crop up for the power trading.

With increased activity in the generation space and the rising demand, power trading has now become more of a commercial activity instead of a technical one. To compensate this shift in the market’s attitude, it is high time that the trading margin should be done away with as the market itself is highly competitive. Even if the trading margin cap is removed, power is still expected to be traded at a margin of 4-5 paise only.  

Q4. What is the impact of non-recovery of dues from distribution companies on power trading? Has your exposure as a trader taken a hit with defaulting utilities and higher generation prices?

States at present lack funds to pay for the charges for power they bought. NETS, like other trading companies, have a substantial level of exposure to defaulting States. As a trader, this default reduces the margin and working capital, as payments have stopped pouring in.

Generators give a 2 percent prompt payment discount, for which traders pay the charges accordingly. However, with utilities defaulting payments to, the trader is no more assured of receiving the same, which becomes a loss for the trader. The major impact being drain of working capital resources and other being unable to get the working capital limits, further, financial institutions restrict the funding for overdue bills for 90 days only, this makes the trading entity to infuse their own funds or start defaulting the generators.

"On an average, a trader is losing at least 15 paise on a unit of power sold at Rs.5. The government and regulators should work on reframing contracts or take steps to free traders from such unwanted risks and pass it on equally amongst generators and distribution companies."

Looking at the regulatory provisions in case of safeguarding defaulting companies, not much of a safeguard is available for traders. CERC does give the facility for opening up an LC; however that is feasible say for only one billing cycle; however in a year there are 52 cycles which need to be accommodated in light of the defaults by distribution companies.

With no assurance of payment and increasing fuel sourcing charges have led to a substantial increase in costs for generators. In such a scenario getting a contract performance guarantee from the generator is impossible.

As a result the trader is stuck in a never ending cycle from all ends. There is an urgent need to relook at the risks which have made power trading unattractive.

Q5. Where do you expect the average traded price to settle?

"I expect the average traded price to settle at Rs. 3.50 per unit. The prices are declining except for certain volatile movements such as the election or high temperatures during summers, excessive monsoon, etc. which cause price spurts and stand out separately while charting the trend."

Prior to the introduction of power exchanges, prices were determined on the basis of the market volume traded. However, after the two exchanges became operational, prices are now determined on the basis of demand and supply. Thus the prices at present are declining as more transparency in its determination has come in the market. Even the Southern Grid has seen a fall in prices.

With competitive bidding a permanent norm, the prices in the NEW grid are substantially lower in the current year as more capacity is getting added and with no firm PPA is in place, the remainder capacity goes as merchant. But as the prices are falling, the generation cost is increasing, this results in a position where generator is reluctant to supply with no firm commitment on the payment of charges including the increased costs. Developers of existing capacity though in a loss are still supplying, keeping in mind the recovery of atleast the variable costs while the fixed cost is piling up.

In the coming two decades, the median tariff is expected to reach Rs. 5-6 per unit as the per unit cost of power generation increases. However at the same time if the tariffs are not bought at a matching level by the distribution companies, the revival of the sector will be uncertain.

Power sector has now become a techno-economic-political game. Technically with loopholes in the regulations, high level of political involvement a different dimension has been added. As a result of this mismatch, the right economic signal is not given. It is an imperative to give all stakeholders the right market signal; the tariffs for end-users have to be increased accordingly at a fixed frequency.

Q6. What are NETS plans for expansion?

NETS is targeting to increase its foothold in the neighbouring (SAARC) region by becoming an active player in bilateral or cross-border power trading in the coming years with Nepal and Bhutan.

"By 2025, we target NETS to have trade links with Japan. The SAARC grid is expected to be in place soon. With Burma an ASEAN country, sharing a long border with India, power links can be established with Thailand and further linked to Japan, another ASEAN member. We expect that the time differential between the countries will play an important role in meeting the peak demand requirements of the two countries."

Q.7. Lanco Group has a 5 percent stake in IEX. What is the expected impact of the 3rd exchange entering the market? Does the market have the capacity to accommodate a 3rd exchange?

Definitely the market will not be able to accommodate a third power exchange. However, being an indirectly government controlled exchange; there are chances of the market to die out. NTPC being a majority shareholder will have the leeway in transferring its merchant capacity to the exchange. It is expected that an administered price mechanism methodology will be followed in determining prices as NTPC would be forced to sell power at lower prices. As a result even if power is being traded at say a market price of Rs. 3 per unit, power will sell at a much lower price on the new exchange. This will force the market price to reduce thereby sending ineffective price signals.

NTPC has already tied up substantial capacity under the MoU route as a result of which the company can easily refrain themselves for quite a number of years from competitive bidding. At present the % unallocated quota of 15 percent of power can find trading space there.

IEX is a completely private run exchange about 90% market share, while PXIL has some discoms but has a market share of 10% on exchange trades. In such a scenario if a fully government owned NTPC run exchange is introduced, the market balance may change. Thus in terms of accommodation I would say that yes the market has space for a 3rd exchange but a government ownership might be a cause of concern.

Q.8. How much capacity do you think will be available for trading in the 12th plan?

Nearly 20,000 MW of capacity will be available for power trading by the end of the 12th plan from the current 8,000 MW.

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