India’s power demand is seen growing over 6% for the second straight fiscal, and above the pre-pandemic levels and the long-period average growth of 5%. This trend of above-average growth could continue for two more fiscals.

The past three decadal trends show power demand tangoes economic cycles. On average, it has grown 100 basis points slower than gross domestic product (GDP). CRISIL foresees India’s GDP growth at ~7.3% this fiscal.

Last fiscal, demand grew 8.2% over fiscal 2021 (when it had contracted 1.2% due to the pandemic) and ~6.9% above the pre-pandemic levels (fiscal 2020), underscoring the robustness of recovery. This was driven by the commercial and industrial (C&I) segments, as manufacturing and services activity picked up.

The first quarter of this fiscal has already seen 18.7% on-year growth, in line with economic recovery.

Says Hetal Gandhi, Director, CRISIL Research, “The first quarter may have accounted for 75% of the expected incremental power demand for this fiscal, with consumption surging across key categories — agriculture, residential, and C&I. While rising ambient temperatures have propped residential offtake, high prices of diesel has cranked up demand for subsidised power from the farm sector. The upcoming festive season, if robust, will also trigger higher-than-expected power demand growth.”

The CRISIL Research forecast assumes slower growth in the second and third quarters, amid expectations of lower export growth, because of rising recession concerns in two of India’s top trade partners.

Interestingly, over the past decade, peak power demand — which is the highest demand in a specific period — has consistently grown faster than base power demand, or the total power requirement.

Surging peak demand increases the need for rapid generation at utilities. Short-term power purchases accounted for 13% of overall generation last fiscal — a 300 bps rise in just a year. Within this, the share of power exchange volume spiked 46% from an average ~30% over the past decade.

The trend is no different this year. Peak demand in the first quarter grew ~20%, while base demand rose 19%. That, and supply constraints, triggered a sharp increase in spot electricity prices, which led the government to cap spot prices. In terms of net bids, not only did purchases rise substantially, but also sellers were limited amid supply constraints due to high international prices of coal and natural gas. Periods in which purchase bids were higher than sale bids led to disproportionate increase in spot prices (refer to chart 3 in annexure),

Says Surbhi Kaushal, Associate Director, CRISIL Research, “The continuous rise in power exchange purchase bids has cranked up prices in the merchant markets to an average Rs 7.8 per unit in the first quarter¹ versus Rs 4.4 per unit last fiscal. With demand forecast to be high this year, too, dependency on the short-term market would sustain. That should keep merchant tariffs above Rs 5 per unit this fiscal.”

Those queuing up at the exchange are states with either a high share of C&I consumers (~43% on average), or high dependency on coal-based power supply (~60% on average, in the fuel mix), along with heavy dependence on imported coal-based power plants. With high demand growth and coal supply constraints, these states are buying, on average, 2.7x of their normal procurement of the past five years (refer to chart 4 in annexure).

¹ Pricing is based on day-ahead market (DAM) segment of the Indian Energy Exchange (IEX), which comprises ~99% of the segment in India