Demand for power in India appears set to close this fiscal with a growth of 9.5-10% on-year, compared with 8.2% last fiscal. That would mark a decadal high rate of growth and almost double the 20-year average of 5.2%.

Growth weighed in at 7.7% in February and averaged 10% on-year for the 11 months despite a high base of fiscal 2022 due to extreme weather events and robust industrial and manufacturing activity. March is unlikely to see any let up amid early warnings on possible heat waves in northern and central parts this summer.

Says Hetal Gandhi, Director – Research, CRISIL Market Intelligence & Analytics, “A hotter-than-usual summer, with a high probability of multiple heat waves, is expected to keep power demand growing even next fiscal at 5.5-6%, despite two straight years of robust growth. The first half should see even higher growth given summer.”

As for generation, renewable (non-hydro) sources are estimated to account for ~11% of power this fiscal and their share is expected to rise a notch next fiscal, with solar and wind accounting for 13%. Hydro power accounts for another 11%.

That said, with storage capacities limited at present, thermal capacities continue to shoulder the burden of meeting any sudden surge in power demand, especially in the summer months when water levels in hydro projects drop. Indeed, the share of hydro had dropped to 8% last summer compared with 11% on average for the full year.

Meanwhile, power plants using imported coal, aggregating to 17 GW, or 8% of the total thermal capacity, were operating at a low plant load factor (PLF) of 21% as of February, compared with the aggregate thermal PLF of 63%. Nearly 97% of these imported capacities are owned by private players.

As a result, short-term power prices have surged. To tame them, the Ministry of Power has floated a tender to buy 1.5 GW power from plants using imported coal with untied capacity for one month (April 10 – May 10). While preliminary assessment indicates existence of 8GW of overall untied thermal capacity, share of imported plants without short and medium term PPA in this untied capacity remains a monitorable.

Says Surbhi Kaushal, Associate Director – Research, CRISIL Market Intelligence & Analytics, “The government aims to pump this entire 1.5 GW to the short-term market at no cost to tamp prices. Imported coal plants would bid on fixed tariff with an upside of price on variable charge indexed at Rs 5.34/kWh. This implies a 20% mark-up on variable charge of Rs 4.4 at an estimated ~Rs 7,500/MT imported coal prices for Q1 of fiscal 2024.”

The move is in addition to the government already having invoked Section 11 of the Electricity Act, mandating all plants using imported coal to operate at full capacity, enabling better supply position. Coal stocks remain at 12 days, compared to 14 days over last 35 months, and all wheels are focusing on getting coal supplies on stream. Structural steps such as fast-tracking coal-based rail transportation projects are also being expedited.

However, short term markets have reacted. A surge in demand las led to purchase bids surpassing the sell bids in the short-term market by 6 GW on average in the last 15 days. The result is a 42% on-year increase in prices in February and a 151% increase on the first day of March. The market clearing price in the day-ahead market (DAM) at the Indian Energy Exchange breached Rs 6.5/kWh in February, which is the highest level seen in the past eight months.

In 2022, the purchase-sell bid differential started turning positive in the first week of March, averaging over 3.5 GW. High prices forced the Central Electricity Regulatory Commission to intervene and reduce the price upper limit from Rs 20/kWh to Rs 12/kWh in April. Despite this, positive differential averaged over 10 GW in April-May 2022, pushing up prices to Rs 10/kWh on average over the period.

CRISIL expects DAM prices to average 6-6.5 Rs/kWh this fiscal, compared to average of Rs 3.1//kWh in fiscal 2015 to 2019. Average price for next year in DAM market is expected to remain under Rs 7-8/kWh, with almost non-operational gas-based power generation of 24 GW to become competitive with falling gas prices.