For govt’s electricity auction to succeed, producers must relent on prices

Weak demand and non-committal power distribution companies (discoms) are undermining the central government’s efforts to revive the thermal power sector.

The government is set to conduct an auction to procure 2,500 MW of electricity for three years and sell it to power distribution companies this month. A similar attempt in 2019 received a tepid response from buyers, leading to the cancellation of the auction.

The fate of this month’s auction remains uncertain as well. With demand weakening, discoms have no reason to commit to long-term purchases in a hurry. Indications are that electricity prices will remain muted in the near term. Fuel (coal) prices, the key determinant of electricity tariffs, are subdued.

With fuel inventories at thermal power plants at comfortable levels, India may even have to temper coal imports this year. “If the economy doesn’t pick up in early 2020, and power, cement, and steel demand remain slow, we see a downside risk to our coal imports forecast,” says Pralabh Bhargava, principal analyst at Wood Mackenzie.

The subdued expectations are reflected in the spot electricity markets. Power prices remain below ₹3 per unit. In December, average prices on the India Energy Exchange (IEX) dropped 11.2% from the year ago to ₹2.9 per unit. Average market-clearing price for the full year (2019) stood at ₹3.1 per unit.

Last year’s failed auction saw the producers offering electricity at ₹4.41 per unit. No wonder discoms shied away.

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