Sector Update | 19 September 2017
Utilities
Merchant power price spike – a nine-day wonder
Peak load growing faster than energy demand in recent months
Power exchange (IEX) prices have doubled from the average of last two years
to more than INR5/kWh in the recent weeks. Interestingly, there is sharper
increase in evening peak prices compared to the rest-of-day prices.
The increase is due to a combination of factors – increase in demand, fall in
hydro and nuclear generation, increased outages at gas plants, and low coal
stocks at power plants.
Demand growth has already moderated in mid-September. Hydro and nuclear
generation has relatively improved. Coal-based generation growth has
decelerated and plant outage has declined. Improving coal supply will trigger
correction in IEX prices, in our view.
Peak demand growth was lagging energy demand growth until August 2016
but has since been outpacing. The trend could accelerate as ‘Power for All’
pushes domestic electricity consumption, which has an evening bias. ‘DEEP’
data is also suggesting rise in demand for part-of-day contracts.
If the trend in sharper growth of peak load continues, the demand for hydro
and gas plants will increase. Rising share of solar power generation will further
drive demand for hydro and gas plants, which can ramp up quickly on
demand.
Exhibit 1: Utilities sector valuation
Rating CMP
(INR)
Buy
215
Buy
169
Buy
79
Buy
1,072
Sell
85
Buy
258
TP Up/(dw) MCAP
(USD M) FY17E
(INR)
%
262
22
17,509 14.2
211
25
21,639 12.0
49
-38
2,013
3.9
1,360
27
2,218
51.9
71
-17
3,566
7.4
305
18
25,340 14.9
EPS
FY18E
17.4
13.3
3.4
88.9
7.3
19.8
FY19E
20.6
15.7
2.7
99.3
7.3
22.0
P/E (x)
FY18E FY19E
12.4
10.5
12.7
10.8
23.2
29.2
12.1
10.8
11.7
11.5
13.1
11.7
P/B(x)
FY18E FY19E
2.0
1.7
1.3
1.2
1.2
1.2
1.2
1.1
1.8
1.5
6.2
5.9
RoE (%)
FY18E FY19E
17.3
17.8
10.9
11.9
5.3
4.2
10.6
10.8
15.8
14.2
48.8
51.8
Powergrid
NTPC
JSW Energy
CESC
Tata Power
Coal India
Source: MOSL, Company
Sanjay Jain - Research analyst
(SanjayJain @MotilalOswal.com); +91 22 3982 5412
Dhruv Muchhal - Research analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 3027 8033
8 August 2016
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Utilities
Lack of coal is driving sharp increase in power rates in recent weeks
Short-term prices on power exchanges (IEX) have doubled from the average of last
two years to ~INR5/kWh in the past few weeks due to a combination of factors.
Electricity demand growth accelerated to ~8% in August 2017 from ~4% in
4MFY18 and ~5% in FY17.
Hydro and nuclear plants failed to contribute to the demand surge due to heavy
silt during monsoon and outage at the nuclear plants. Hydro generation fell
~12% YoY and nuclear generation fell ~36% YoY in August.
It fell upon coal-based plants to meet the demand surge and loss of generation
from alternate sources. Generation by coal-based plants grew ~17% YoY in
August. Coal-based plants were caught off guard for such a surge in demand,
and until then were trimming their coal stocks. Coal-based plants ended August
with coal stock of 12mt, representing just ~10 days of consumption.
At the same time, Coal India was also slowing down its production run-rate due
to weak demand and due to issues at some of its subsidiaries (MCL’s production
has declined for 11 consecutive months).
The situation was exacerbated by increase in plants under outage/shutdown. Of
the installed conventional generation capacity of ~270GW, ~86GW was under
outage as at the end of August 2017, higher by ~7GW YoY. Their unviability
when IEX prices are low was causing the higher outage.
Moreover, as the situation reached critical levels, we understand Coal India held
back supplies to the non-power/non-FSA sectors to stabilize the power market.
This has pushed merchant power prices even higher.
Prices to stabilize, as coal supplies improve and capacities restart
We expect IEX prices to stabilize at earlier levels, as Coal India ramps up
supplies.
Electricity generation growth has already moderated to ~4.5% in mid-September
2017.
Hydro generation is also suggesting an improvement – declined ~2% YoY in mid-
September as against decline of ~12% in August. Similarly, nuclear generation
has declined ~12% in mid-September as against ~36% YoY in August.
Coal-based generation growth has moderated to ~7% in mid-September as
against growth of ~17% in August. Coal stocks at power plants have fallen even
further to just ~7 days of consumption. As Coal India focuses on ramping up
supplies, we expect coal stocks to improve.
The higher IEX price has also incentivized restart of some of the capacities under
outage. Plants under outages are now ~5GW higher YoY at ~76GW.
August
FY18
77,128
2,697
4,022
2,272
15,529
8
1,055
102,711
17 days of September
FY17
FY18
YoY %
41,323
44,159
6.9
1,534
1,585
3.3
2,628
2,660
1.2
1,761
1,540
-12.5
8,395
8,203
-2.3
5
5
0.0
515
560
8.8
56,160
58,711
4.5
Source: MOSL, CEA
Exhibit 2: Conventional power generation
FY17
65,839
2,678
4,403
3,550
17,668
71
1,029
95,237
YoY %
17.1
0.7
-8.7
-36.0
-12.1
-88.1
2.5
7.8
Coal
Lignite
Gas
Nuclear
Hydro
Others
Bhutan
Total
19 September 2017
2

Utilities
We expect India’s electricity demand to grow at ~7% per year over the next few
years. While conventional capacity addition has peaked out, we believe there is still
enough spare capacity in the system to limit short-term prices at ~INR3/kWh.
Rising evening peak prices suggest opportunity for gas-based plants
Evening peak power prices rising sharper than rest-of-day prices…
Another interesting pattern is developing in the short-term power market. The
evening peak hours of 19 to 24 are showing a higher than average increase in price
than the price for the rest of the day. Evening peak price was 1.7x of the rest-of-day
price in August 2017, as against 1.4x in the same month of last few years. The
reading was similar in July – evening peak price was 1.6x of the rest of day prices, as
against 1.3x in last few years.
Peak prices have spiked in
recent months
Exhibit 3: Evening peak (19-24 hours) to rest-of-day prices - x
2014
1.57
1.31
1.22
1.26
1.35
1.35
1.36
2015
2016
2017
1.74
July
Aug
Source: MOSL, Company
Exhibit 4: Hourly IEX prices (INR/kwh) in August 2017
2014
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Source: MOSL, IEX
2015
2016
2017
Exhibit 5: Hourly demand (M kwh) on IEX in August 2017
2014
7,000
6,000
5,000
4,000
3,000
2,000
Source: MOSL, IEX
2015
2016
2017
…as peak demand rises at a faster pace…
The increase in evening peak price is in sync with the development in electricity
consumption pattern. Energy demand (MU) growth has mostly outpaced peak
demand (MW) growth from April 2015 until August 2016. Energy demand grew at
an average of 6% as against peak demand growth of 3% in FY16. However, the
pattern reversed in FY17, as energy demand grew 4% against peak demand growth
of 6%. The trend continues in 4MFY18, as energy demand growth of 5% lags peak
demand growth of 7%.
19 September 2017
3

Utilities
Exhibit 6: India energy and peak demand growth YoY - %
20
15
10
5
0
-5
Energy - growth yoy %
Peak - growth yoy %
Peak demand growth has
started to outpace energy
demand growth.
Source: MOSL, Company
…and outage of gas plants increases
In addition to the demand trend, we believe the spike in evening peak prices in
recent months is also on account of increase in outage of gas-based plants. The
plants under outage have increased from ~5GW for most part of FY17 to ~9GW in
the past four months. Gas-based plants are technically suited to meet peak load –
an outage there is driving price spike during the evening.
Outage of gas plants has
increased.
Exhibit 7: Gas plants under outage – GW
Gas plants outage - GW
9.4
5.8
5.8
6.4
6.1
5.5
4.9
4.9
5.5
5.5
5.1
9.5
9.7
Source: MOSL, CEA
Evening peak outlines India’s electricity consumption
The evening peak pattern is representative of India’s electricity consumption and
could accentuate even more. India has a sharper evening peak, unlike some of the
developed nations, due to concentration of lighting and cooling demand of domestic
consumers. The ‘Power for All’ goal accelerates the objective to supply power 24x7
by 2019. By its nature, the goal will increase power supply to un-electrified and rural
households, at least in the initial phases, until commercial and industrial demand
catches up. This could accelerate evening peak consumption.
19 September 2017
4

Utilities
Exhibit 8: Typical all-India load curve
India has an evening peak
load pattern.
Source: MOSL, POSOCO
Residential consumers have
an evening load bias.
Exhibit 9: Load characteristics of different types of load
Source: MOSL, POSOCO
DEEP platform bidding highlights the demand for part-of-day power
In
one of our earlier notes,
we had highlighted how DISCOMs are getting more
efficient in their power purchases by getting into purchase contracts for part-of-the-
day to match their demand profile. However, to our surprise, part-of-day tariffs
were at a discount to full-day tariffs. Recent data on DEEP suggest that the pattern is
normalizing, with part-of-day contracts now quoting a premium. Most of the recent
part-of-day contracts are now quoting upwards of INR4/kWh, with some even as
high as INR9-11/kWh. Not only are the prices higher, some of the demand is also
unmet. Recent part-of-day contracts by Bihar and UP did not receive bids for even
half of the requested quantity. Unlike exchanges that are day-ahead markets and
lack visibility, DEEP contracts are generally longer. Power plants (particularly gas-
based) can better plan their operations and benefit from such higher prices.
19 September 2017
5

Utilities
Exhibit 10: DEEP full and part-of-day tariffs
INR/kWh
5.5
5
4.5
4
3.5
3
2.5
2
Full day
Time of day
Exhibit 11: DEEP full and part-of-day volumes
BU
12
10
8
6
4
2
0
Full day
Time of day
Source: MOSL, MSTC
Source: MOSL, MSTC
If the trend in sharper growth of peak load continues, the demand for Hydro and gas
plants will increase. Rising share of solar power generation will further drive
demand for Hydro and gas plants which can ramp up quickly on demand.
19 September 2017
6

Utilities
NOTES
19 September 2017
7

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19 September 2017
8