Merchant power tariffs exhibit extreme volatility; players have significant untied capacities
Amritha Pillay 29 June 2010

Merchant power tariffs, which were at a high of Rs14 per unit last year, are expected to stabilise at an average rate of Rs5 per unit for the next couple of years. Jindal Power, Adani Power and Indiabulls Power are companies with large exposure to this volatility of rates

In 2009, merchant power tariffs were ruling at Rs14 per unit. Currently, they are at Rs2-Rs5 per unit. The wide fluctuation in tariffs indicates the volatility in this trade.

With a major part of their respective capacities untied, Jindal Power Ltd, Adani Power Ltd and Indiabulls Power Ltd are the main players with major exposure to these price fluctuations.

Jindal Steel and Power Ltd (JSPL) has been an early and dominant player in the merchant power segment. Jindal Power Ltd (JPL), which is a subsidiary of JSPL, currently has 1,000MW of operational capacity. This 1,000MW is being generated from the Tamnar power plant in Chhattisgarh which has been operational since 2008. Last year, the entire 1,000MW from this plant was sold through short-term power purchase agreements (PPAs).

According to JPL's Draft Red Herring Prospectus (DRHP) filed with the Securities and Exchange Board of India, the company has a total project portfolio of around 15,660MW. Out of this, around 1,000MW is operational, 10,480MW is under implementation and 4,180MW is in the planning stage. The DRHP further states that out of this 11,480MW (the operational and under-implementation capacities), around 2,125MW has already been tied up.

Thus, based on its current operational capacity, almost 100% of the company's capacity is based on short-term sale. Taking the total capacity planned to be added by 2020, around 81% of the planned capacity is still untied.

Adani Power at present has a commissioned power capacity of 660MW, at its first two units of the Mundra Phase-I project, Gujarat. The company plans a total generating capacity of 6,600MW to be operational by 2012. Out of this 6,600MW, 1,757MW or 26% is untied.

Indiabulls Power Ltd plans a total capacity of around 6,615MW. The company plans to have around 25% of this total planned capacity on short-term sale. Thus, the company's total capacity exposure to volatile merchant rates is around 25%.

"The power companies whose performance would be highly volatile are JSPL, along with Adani Power Ltd and Indiabulls Power Ltd to some extent. These three companies have a significant capacity which is untied," said Arun Kumar, research analyst with a broking firm.

Merchant power tariffs were at a high of Rs14 to Rs15 per unit in early-June 2009. Last week, merchant power was traded in the range of Rs2 per unit to Rs5 per unit. Going forward, industry experts expect merchant power rates to stabilise at an average rate of Rs5 per unit for the next couple of years.

JSPL's average price realisation has also moved in tandem with merchant power rates. The company's average price realisation was around Rs2.61 per unit in FY08, which increased to Rs5.91 per unit in FY09. It was highest in Q1FY10, at Rs6.71 per unit.

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