Citi: India Electric Utilities- Merchant Volumes Up – But Prices Have Cooled Off

India Electric Utilities
Merchant Volumes Up – But Prices Have Cooled Off
 Merchant power volumes going up — Merchant volumes as a % of India’s total
generation have been steadily inching upwards with the contribution of merchant
volumes moving up 12.9% in July 2010 vis-à-vis 9.1% in July 2009.
 Merchant prices have cooled off significantly — Average prices in the merchant
markets have come down to ~ Rs4.00/kWh in 2QFY11 vis-à-vis ~Rs5.50/kWh in
1QFY11. The key reasons are strong monsoons in India, particularly in north India
which has led to higher than expected hydroelectric power generation in 2QFY11,
and a fall in agricultural pumpset demand in north India.
 Prices fell in May, June and July 2010 — CERC’s monthly price monitoring report
has still not provided prices for the month of August and September 2010.
However, the VWAP prices have declined MoM by 19%, 12% and 8% in the
months of May 2010, June 2010 and July 2010 respectively. Average VWAP
prices were at Rs4.56/kWh in July 2010.
 OTC forward curve implies weak prices in Oct-Nov 2010 — The forward curve
made for September to November 2010 is in backwardation (downward sloping).
During the month of September 2010, the OTC sale price is Rs5.24/kWh which
decreases to Rs4.30/kWh in October and remains at that level till 15 October. On
16 October it drops to Rs4.28/kWh and remains there till November end.
 ... stark contrast to expectations in June 2010 — It may be worthwhile to note
here that the forward curve made in June for the July to September 2010 was in
contango (upward sloping) whereas the forward curve made in August 2010 is in
backwardation (downward sloping).
 Negative for merchant IPP players in the short term — The fall in merchant prices
starting May 2010 and expectation of weak prices till November 2010 is a shortterm
negative for IPP players who have exposure to merchant markets, like JSW
Energy (JSWE.BO; Rs122.65; 2L), Adani Power (ADAN.BO; Rs137.55; 1L), Lanco
Infratech (LAIN.BO; Rs69.90; 1M) and Jindal Steel and Power (NR).
 Medium term prices could improve — We believe that once the Indian monsoons
are over, merchant prices could once again rebound to Rs5.00/kWh levels given
the continued power deficits in the country.