Three factors to keep in mind while investing in power sector

Electricity demand in the country, a barometer of economic activity in the country, saw its growth rate pegged at a little more than 12% last month over the year-ago period. This comes after softer demand that actually declined marginally the previous month.

But there are multiple factors playing out in the sector, so if you are looking to build an exposure to the sector, here are some key points to keep in mind.

Demand

Demand fell 0.7% in October 2022 year-on-year, but rebounded last month as per provisional data from power systems operator POSOCO. This was almost equal to the 12.7% rise in September.

The decline in demand in October was attributed to heavy rainfall caused by the delayed monsoon withdrawal. On a month-on-month basis, demand in November is estimated to be around 1.4% lower than October due to the seasonality factor.

Despite the slowdown in October, the demand growth for the full year is estimated to remain healthy at around 7%, led by the high growth witnessed in the first seven months of the current fiscal. Further, the demand growth for the coming year is estimated at 5-5.5% on the basis of the growth prospects of the Indian economy, according to rating and research agency ICRA.

Tariffs

Average tariffs in the day-ahead spot power market increased to Rs.4.6 per unit last month from Rs 3.8 per unit in October. While the prices have moderated post Q1 FY23 following the moderation in demand and higher supply from renewable energy and hydro stations, they are expected to fluctuate at elevated levels in FY23 due to high coal prices and subdued domestic coal stock level.

Coal

Despite the rise of renewable energy projects in the country and limited gas-powered plants, thermal power remains the mainstay feed and so coal is a key determinant for power generation.

The coal stock position of the power stations at the all-India level increased slightly to 10.9 days as on November 28, 2022 from 10 days as on October 31, 2022, though remaining below the normative level of 20.3 days.

This is led by the increase in supply by the coal companies on a month-on-month basis and moderation in electricity demand. The sustainability of the same remains to be seen. The shortfall is prominent for the state gencos of Rajasthan, Madhya Pradesh, Andhra Pradesh, Tamil Nadu and West Bengal.