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Gujarat invites bids ending drought in LT PPA market
Merchant power capacity shrinking rapidly
* After a hiatus of 4-5 years, demand for long-term PPA has emerged in the power sector. Gujarat has invited bids for 3,000MW to meet its rising demand; this, coupled with many short-to medium-term PPAs will see merchant power capacity shrinking rapidly — from 19GW a few months ago to 9GW within 12 months.
* Further, the CCEA has approved the policy to grant coal linkage for even short-term power sales. We have highlighted in our recent reports that power oversupply has started shrinking and the market is likely to get balanced in 2-3 years. This augurs well for the sector.
* Jindal Steel & Power is the best placed to benefit from the turnaround in the sector, while our top picks in the sector are NTPC and Power Grid. Further, the CERC regulations (2019-24) have addressed many concerns on these two names.
Gujarat invites bids for long-term PPA of 3,000MW
Gujarat DISCOM has invited bids for procurement of 3,000MW (+/-20%) power on a long-term basis. The bid due-date is 17th Jun’19. Supply will start 57months (~5years) from the bid due-date. Gujarat currently has long-term PPAs of ~19GW (based on our plant-wise analysis of long-term PPAs signed by DISCOMs), while its peak power load was ~17GW in FY19. If its peak demand grows by ~6% CAGR over the next five years (in line with growth in the past five years and India’s average electricity growth forecast), its peak load will increase to ~22GW. Thus, it will fall short of long-term PPAs to meet its peak load.
Long-term PPA after more than four years
This will be the first long-term PPA bid by a state DISCOM after a gap of nearly four years. It supports our thesis that India’s electricity market is gradually balancing out and demand for new PPAs will emerge soon (link).
The conventional capacity to peak power load ratio of India will improve to ~1.3- 1.4x by FY22-23, moving towards its long-term historical average and down from its peak of ~1.7x, suggesting the market is balancing out (Exhibit 2 and Exhibit 3). The conventional capacities also include ~19GW of coal-based merchant power plants. Excluding this, on a long-term PPA basis, the market is expected to balance out even earlier, unless the DISCOM chooses to increasingly rely on the merchant power market. We expect demand for new long-term PPAs to improve.
We also note that individual states plan their respective electricity balance. While overall, the India equation suggests a balanced market by FY22, within this equation a few states would be in deficit, while some will be in surplus. Unless DISCOMs efficiently trade this gap, the deficit states should start demanding new medium/long-term PPAs even before FY22; signs of which are already visible.
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