The Banking and Strategy Initiative

Chillin' out till it needs to be funded

When Power is traded because of elections…

Power Consumed = Fn(Elections, Monsoons)

Oil Prices Surge During Friday Trading

It is not a diatribe. In this post we will cover the publicly traded, new crown jewel of the Indian Financial Markets showcase, and an Infrastructure imperative like no other..and also, significantly related to the masters of Enron.

The Power Trading Corporation buys and sells power, buying from Producers under longer term Power Purchase Agreements and available surplus directly as exchange to counter-parties that can be State Electricity Boards and other Corporates.

The markets in the US are well developed and most power available is consumed under longer term contracts and or delivery mechanisms supporting exchange based trading in defined spot, forward and futures contracts

The Indian Power Market

The Indian Power producers have claimed capacity of 150 GW and around 800-900 billion units were consumed in 2009 at a peak availability of 80-85 GW Out of this 40%is made available thru NTPC

In India the sole trading corporation currently engaged in Merchant Power trading and PPA trading for the Public Sector is the PTC with defined margin targets of INR 0.07 or $1750 per million units (kWh) It traded 15 billion units in the 9 months ended December 2009 and this volume is likely to be 28-30 billion units in 2010 and a CAGR of 25% going forward.

Private UMPPs and other larger 1000MW units etc are also likely to be sellers of Power to the merchant power market in absence of Power Purchase agreements. In this demand driven market, prices of electricity go up to 40-45 c (INR 16-20), four times the peak rate for domestic consumption in megacities and boom towns.

PTC, per its Chairman/MD’s tele call on NDTV Profit trades more than 10 billion in the merchant market on shorter term contracts in Bihar and Orissa, while power from Bhutan plants ( Between 2-3 GW going up to 5 GW, all routed to Indian companies) is supplied on longer term contracts but with a lower margin of INR 0.03 or $750 per million units

Though the CAGR is robust, Sales planning is typically done around factors that affect supply ( normal monsoon means supply would be higher) and demand ( I have no idea why, but Power Corporations sold more power during the Private Elections, Are politicians saving on diesel and buying wind farms?)

Increasing Capacity

Considerable investment decisions in more than 20 UMPP projects that alone add 100 GW in Capacity would increase the availability of PPAs while future investments in Transcos and Distcos directly by producers like Reliance and Jindals would mean significant supply chain profitability advantages to such players. PTC and financiers like REC would still have a significant opportunity to raise the bar and create a richer market with more Transmission Companies coming together to complete the National Grid between Delhi Bangalore, Mumbai and Kolkata and feeder grids planned from those for private / public purposes industrial or residential.

Despite availability of power infrastructure investments from RC, IDFC and the consequent financing of PGC projects, cost escalations are going to be the order of the day for logistics issues such as sale and purchase of land for project purposes, non availability of Chinese equipment and engineers ( that wold be a significant cost control strategy no longer available to producers and Transco business ) and force majeure such as unscheduled elections and appointments of Economists and redistribution of powers that are ongoing between Ministries, RBI and regulatory institutions like SEBI, IRDA and others.

The Developed Markets

Smart Grid technologies and “Price Responsive Demand” and other reforms are even today proposed in developed markets esp. the Eastern Interconnection grid (PJM) and the other 4-5 regional grids in the US. Developed Markets also exist in Australia, NZ and european Markets like Austria. Current trading mechanisms expect development of price based on demand in the grid every hour, while not neglecting but minimising more Out of merit (free load compensation) on the grid and more responsive pricing not fixed by PPAs in the Local sense of the word.

The Eastern Interconnection Grid served by PJM in the US serves 14 states and DC across a population of 51 millionand itself serves up 165 GW every year ( twice that of India in 2009) The two important cost factors in these markets are fuel prices and Environmental Protection that added $21 bn since 2002 to comply with Fed guidelines PJM billed $128 billion since its inception and its own efforts for the Smart Grid would require a further investment of more than $50-60 billion. Looking forward these RTOs( Regional Transmission Operators) would be ready benchmarks for Indian Power Transmission Companies as they wheel out the units to match the Demand Supply Gap and grow to maybe thrice the size of Power Infrastructure available to us in the next ten years. This regional grid eaarns annual revenues of $265-270 million annually.


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