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India - Politics, Industrials, IT and Large Caps, EMAlpha

Pankaj Sharma

India - Politics, Industrials, IT and Large Caps

Thematic (Sector/Industry)

India Electric utilities / Thematic (Sector/Industry)

After a sharp 40% m-o-m decline in the average day-ahead spot prices during November, the prices in spot market for electricity have fallen another 10% in December. The decline in volumes is even more dramatic and after 47% m-o-m decline in average day-ahead trading volumes during November, the average volumes have fallen another 15% during December. For previous few months, electricity spot market in India was experiencing increased demand with average prices and volumes at their highest levels in several years. But, this has changed now. With moderate weather conditions now and lower temperatures in Northern and Western regions, demand for short-term power purchases has come down significantly. We see this as a sensible approach from power distribution companies (DISCOMs) because this is the time for DISCOMs to exercise caution and control the purchase prices and restrict volumes. Why? Because the analysis of latest data tells that the AT&amp;C losses in the system has increased and gap between tariffs and the cost per unit is also widening. The evidence from previous cycles of high spot prices suggests that a sharp increase in prices in spot market significantly contribute in making the DISCOMs commercially unviable. It is good news that  DISCOMs are more circumspect and have reduced the quantum of power purchases and the price at which they are interested in short term power purchase.Much more reasonable prices in spot electricity market is a positive development and while the prices need to remain remunerative enough, exceptionally high spot market prices would have hurt majority of participants in this power sector value chain. At the same time, the stocks which could get negatively impacted because of price decline in spot electricity market include <a href="https://www.smartkarma.com/entities/247" target="_blank">Adani Power Ltd (ADANI IN)</a> and <a href="https://www.smartkarma.com/entities/14949" target="_blank">JSW Energy Ltd (JSW IN)</a>. A decline in trading volumes is also bad for <a href="https://www.smartkarma.com/entities/25946" target="_blank" data-smartkarma-citation="entities:25946:1">Indian Energy Exchange Limited (IEX IN)</a> for which the revenues and margins remain directly linked to trading volumes.

After a sharp 40% m-o-m decline in the average day-ahead spot prices during November, the prices in spot market for electricity have fallen another 10% in December. The decline in volumes is even more dramatic and after 47% m-o-m decline in average day-ahead trading volumes during November, the average volumes have fallen another 15% during December. For previous few months, electricity spot market in India was experiencing increased demand with average prices and volumes at their highest levels in several years. But, this has changed now. With moderate weather conditions now and lower temperatures in Northern and Western regions, demand for short-term power purchases has come down significantly. We see this as a sensible approach from power distribution companies (DISCOMs) because this is the time for DISCOMs to exercise caution and control the purchase prices and restrict volumes. Why? Because the analysis of latest data tells that the AT&amp;C losses in the system has increased and gap between tariffs and the cost per unit is also widening. The evidence from previous cycles of high spot prices suggests that a sharp increase in prices in spot market significantly contribute in making the DISCOMs commercially unviable. It is good news that  DISCOMs are more circumspect and have reduced the quantum of power purchases and the price at which they are interested in short term power purchase.Much more reasonable prices in spot electricity market is a positive development and while the prices need to remain remunerative enough, exceptionally high spot market prices would have hurt majority of participants in this power sector value chain. At the same time, the stocks which could get negatively impacted because of price decline in spot electricity market include Adani Power Ltd (ADANI IN) and JSW Energy Ltd (JSW IN). A decline in trading volumes is also bad for Indian Energy Exchange Limited (IEX IN) for which the revenues and margins remain directly linked to trading volumes.

Power Grid Corporation Of India (PWGR IN)

India Power Sector: DISCOMs Turn Cautious and Restrict Short Term Purchases, Better Late than Never