Power tariffs in open market crash to Rs2-Rs5 per unit

Power tariffs in the open market have crashed to Rs2-Rs5 per unit in December from Rs12-Rs14 per unit in June 2009. Seasonal fluctuation leading to low demand is being stated as the reason for these low tariffs

Riding on high merchant power tariffs, a number of power companies have planned huge capacity expansions to cater to merchant power trading. The recent drop in merchant power tariffs, however, has shown that prospects are highly seasonal in this sector.

Power tariffs have fallen to Rs2 to Rs5 in December from a high of Rs12 to Rs14 per unit in June 2009. Merchant power tariffs have been on a downturn since September. They were quoted in the range of Rs6 to Rs8 by the end of September and the beginning of October 2009. In November they fell to Rs2 to Rs4 per unit, with power traded during non-peak hours falling to below Rs2 in mid-December 2009. During the last week of December, day-ahead market prices for merchant power on the Indian Energy Exchange ranged between below Rs2 per unit to Rs5 per unit.

Analysts believe that this drop is a seasonal phenomenon as power demand goes down in the winter. The situation will change from March onwards, with the onset of summer, they said.

Earlier, Moneylife had reported on how the volume of power trading over the past three years has jumped at a 22% compounded annual growth rate (CAGR) to 21 billion kilowatt hour (kWh) in 2008. These units were also traded at comparatively high tariffs—557 million units were traded between Rs8-Rs10 per unit (as against nil in 2007) and 5,292 million units were traded for Rs6-Rs8 per unit (as against 461 million units in 2007).

These high prices enjoyed in merchant power trading are due to the liberty that merchant power-generating companies have to trade power at any price during periods of peak shortage. The cost of electricity generation ranges between Rs1.75 per unit for coal-based power projects to Rs3.50 per unit for thermal power plants. Selling at Rs5 and above ensures super profits. At times of peak demand, power trading can fetch as much as Rs14 per unit, as reported in June 2009.

However, merchant power trading also has a downturn. Such high tariffs could be enjoyed only during the peak demand season; the prices could fall well below Rs5 per unit during off-peak demand seasons like winter—as in November 2009 and December 2009. As companies will not be able to cover their fixed costs and thus incur losses, companies trade power even at lower tariffs.

Lured by high merchant power tariffs, a number of companies have set aside some share of their total power production for merchant power sale. According to a report by broking firm Enam Securities Pvt Ltd, new power projects of 62 gigawatts (GW) will come up between 2011 and 2014. Of this, 13.3GW will come from merchant power projects.

Recently, Shree Cement Ltd announced plans to set up a 300 megawatt (MW) merchant power capacity at Beawar in Rajasthan. The power generated from this plant will be sold in the open market and not used for captive purposes.

Cement major Shree Cements has planned merchant power plants; drug manufacturer Torrent Ltd also plans similar expansions. Torrent is planning power projects of 3,647MW, 40% of which will be sold as merchant power. Adani’s 6,600MW power project includes 1,848MW for merchant power.

Huge power capacity is also expected from Jindal Steel & Power Ltd, which plans to ramp up capacity for merchant power from the current 4,000MW to 11GW by FY12 and 30GW by FY17.

Sterlite Industries Ltd also plans to set up a 2,400MW power project through Sterlite Energy, which is its 100% subsidiary, to gain space in the merchant power segment. Sterlite is planning power projects for a total of 4,400MW, out of which 40% would be merchant power projects.
 

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Bond market in a quandary

Yields on government bonds have witnessed wide fluctuations as participants speculated on the impending rate hike—but the government still remains non-committal on the timing of this move

Over the past few days, yields on the benchmark 10-year bonds have seen volatile movements, as traders speculate on the awaited monetary actions by the government. Although the Centre has given strong signals for a withdrawal from its supportive stance on interest rates, it is not clear when and how the government will put its plans into motion.

 The yield on the 6.35% note due January 2020 fell two basis points to 7.55% yesterday after Planning Commission deputy chairman Montek Singh Ahluwalia dismissed rumours of the Reserve Bank of India (RBI) raising interest rates before the January monetary policy review. Earlier, the 10-year bond yields were pushed to their highest level in about 14 months, amid speculation that rising inflation would prompt the central bank into hiking interest rates.

Indeed, the government has been sending mixed signals from time to time, with no clear indications of the timing and extent of rate hike. It has been putting off the upward revision in interest rates in the light of continued sluggishness in credit growth. Bank credit grew by just 10.5% in November, which may force the RBI to further bring down its credit growth target from 18%. At the same time, the rapidly accelerating food and wholesale price inflation is keeping the central bank on its toes.

This has also put bond markets in a spot of bother. RVS Sridhar, treasury head of Axis Bank confirms, “Currently, the bond market is worried about the rate hike. It is not sure what would be the extent of action, though it knows that RBI would tighten rates soon. At some stage, in the matter of the next few quarters, markets are pricing in the hike in reverse repo rate.”

The RBI is widely expected to implement a hike in the cash reserve ratio (CRR), the percentage of excess reserves banks should keep with the RBI, sometime around January. Mr Sridhar also believes that there is a high probability of CRR hike from next month. “It could be announced even before the policy. Hike in the reverse repo rate, to my mind, is unlikely before June 2010.”

Mr Sridhar opines that the 10-year yields will move in a band of 7.50%-7.75% until March 2010. He expects rates to remain around 7.75% around June.
 

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Cotton, Coconut and Edible Oil

The prices of Gujarat Sankar-6 (GS-6) medium staple Bt cotton closed at Rs26,200-Rs26,300 per candy on 24th November, up from Rs25,100-Rs25,200 per candy on 21st November. This rise is attributed to Chinese demand and buying by domestic mills. Prices are expected to stabilise at Rs26,200-Rs26,500 per candy for a few days and, if millers continue their aggressive buying, the prices may touch an...

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