An analysis of the Power sector in India

A Brief Introduction

More than 63 % of India ‘s entire installed capacity is contributed by thermic power. Western part histories for largest portion ( 30.09 % ) of the installed power in India followed by Southern part with 27.76 % . Unbalanced growing remains the cause of concern for the Indian power sector. Merely approximately 56 % of families have entree to electricity, with the rural entree being 44 % and urban entree about 82 % . Southern part remains the dominant part in renewable energy beginning accounting for more than 57 % of the entire renewable energy installed capacity. India ‘s power coevals has grown with nominal rate at 0.65 % in 2008 compared with 3.90 % increased in 2007. Thermal, hydro and atomic and wind are the major beginnings of power coevals. Thermal power coevals recorded positive growing at 3.25 % in December 2008 nevertheless hydro and atomic were recorded negative growing rate at 12.41 % and 21.62 % severally in December 2008 compared with December 2007. In April-December 2008 power coevals were recorded 2.57 % growing compared with April-December 2007. There has been important betterment in the growing in existent coevals over the last few old ages. As compared to one-year growing rate of about 3.1 % at the terminal of 9th Plan and initial old ages of 10th Plan, the growing in coevals during 2006-07 and 2007-08 was of the order of 7.3 % and 6.33 % severally.

Power Generation is chiefly owned by the authorities ( shut to 90 % ) and the remainder of the coevals capacity is controlled by the private sector. Energy shortage in India has increased over the old ages. During the twelvemonth 2007-2008, mean energy deficit was 9.0 per centum and top out energy deficit was 15.2 per centum. As India develops, it is expected that energy demand will increase by more than 8 per centum over the average term. Factors that have been blighting India ‘s power sector are capacity deficits, frequent power failures, hapless dependability and deteriorating physical and fiscal conditions. Since bulk of power coevals is through thermal beginnings which are dependent on fossil fuels and do environmental debasement through C emanations. Off tardily the authorities is puting more accent on utilizing hydro and weave energy beginnings for power coevals which are environment-friendly.

Break-up of Power Generation in India Mar’09

Beginning: Central Electricity Authority, BAS-ML Research

An analysis of the Power sector utilizing Porter ‘s Five Forces theoretical account

Buyer Power

Based on the undermentioned parametric quantities it can be said that Overall the purchaser has weak power.

Low Switch overing Cost – exchanging cost for the purchasers is low as of now but is supposed to increase when new participants come in the market as the merchandise in non differentiable i.e. electricity.

Buyer size – Very little.

Oligopoly Threat – Very Low.

Undifferentiated merchandise – As the merchandise i.e. electricity is uniform merchandise, so this increases purchaser power.

Inclination to exchange – Buyers will exchange to the provider who is efficient and cost effectual.

Price sensitiveness – Not much monetary value medium

Fiscal musculus – Nothing as compared to PSEs.

Buyer independency – Low as of now but if more providers come into image as Govt. has sought competition in this market, the purchaser power will increase.

Product dispensableness – Very Low.

Supplier Power

Based on the undermentioned parametric quantities it can be assessed that the provider Power in High.

Supplier size – Very Large as the providers are Large PSEs.

Oligopoly menace – Small figure of providers enjoy monopoly, thereby lending to the provider power.

Switch overing costs – Very high, as merely big govt. companies are the providers.

Player independency – Low

Substitute inputs – As no replacement inputs, so the houses have no pick.

Player dispensableness – High

Differentiated input- Input signals are same i.e. electricity in instance of company purchasing electricity from sweeping market and selling to the end-users, and coal or gas in instance the company is in power coevals field.

Menace of New Entrants

The Threat of new entrants is moderate based on the undermentioned parametric quantities.

Low Switch overing Cost – Switch overing cost for the end-user is low, so it increases chance for the new entrants.

Undifferentiated merchandise – Merchandise is non differentiable i.e. electricity, so the users have the inducement to exchange to the low cost provider. This increases the chance for the new efficient entrants.

Fixed costs – High fixed cost Acts of the Apostless as a barrier to entry for new entrants.

Small ordinance – Delicensed coevals and multiple licences in the distribution in the same country of supply Acts of the Apostless as an chance for the new entrants.

Distribution accessible – Increasing the menace of new entrants.

Suppliers accessible – Increasing the menace of new entrants.

Market growing – High, taking to great chances for new entrants.

Menace of Substitutes

The Threat of replacements is Weak as per the undermentioned parametric quantities.

Low Switch overing Cost – The cost of exchanging to replacements like gas, solar penal, etc. is high.

Rivalry among existing houses

The competition among existing houses is low as per the undermentioned parametric quantities.

Competitor size – Very Few companies really big in size like NTPC, NLC, NHPC, NPCIL, PGCIL etc.

Number of participants – Very few.

Hard to go out

Ease of enlargement – Difficult because of deficiency of investing and resources.

Why should endure derived functions be introduced in India?

Estimates suggest that the unutilized hydro power potency of India is in surplus of 0.15 Million MW. This figure indicates that there is turning importance of conditions dependent hydro and air current based power undertakings in India. Power coevals through hydro and air current depends on a figure of critical conditions factors such as rainfall, snowfall, wind velocity etc. Already weather derivative merchandises based on these indices is being used in a figure of states. With the debut of “ handiness based duty ” the topographic point market for electricity trading has come up where electricity is bought and sold by market participants like manufacturers, consumers and mediators. These developments have taken the market for electricity closer to other normal markets in the economic system where derivative trading has been successfully traveling on. Indian electricity market is still really much controlled by the authorities unlike the US market which is extremely competitory. The Indian authorities offers a figure of subsidies to the consumers thereby absorbing the cost of production and transmittal and increasing the financial shortage. Introduction of conditions derived functions will assist in go throughing the cost to the consumer thereby cut downing the load on the authorities. Continuous supply of energy to agribusiness and industrial sector is indispensable for the rapid growing of the economic system. The authorities can non afford to overlook this issue as this would move as a major hindrance to the foreign direct investing. Introduction of conditions derived functions would convey in a batch of private engagement in energy sector thereby doing it more competitory, efficient and robust.

Introduction of conditions derived functions would function as an effectual hazard fudging mechanism for Indian power sector in comparing to other options such as long-run power buying understandings.

Electricity Derived functions and long term power buying understandings:

All trade goods are being successfully traded on Indian stock exchanges but derived functions trading in power sector has non begun yet. Weather derived functions would be traded shortly one time the parliament approves the amendment in Forward Contract Regulation Act. Although the electricity derivatives market have non done that good world-wide analysts suggest that unless the topographic point market for the implicit in trade good is good functioning, it is really hard to hold a executable derived functions market. It would be a hard undertaking to advance electricity derived functions in India as the topographic point market in electricity is still in its turning phase and private engagement is about nil.

Some of the demands that should be met for a feasible electricity derivative market:

An active and competitory topographic point market with a big figure of private participants

Government should cut down its control over coevals, transmittal and distribution of power

Handiness of equal figure of power exchanges that would provide to the demand of each of the geographically metameric electricity market.

There should be sufficient excess power coevals capacity available so that power may be transmitted to want finish without any loss of clip.

The above characteristics are nonexistent in the Indian market with the bulk of the control lying with the authorities thereby doing the electricity market in India extremely non-competitive. As per studies it is suggested that in a non-competitive market demand for power should be met by long term power buying understandings and a really little per centum should be traded in the topographic point market because of monetary value volatility. Such understandings hedge the hazard of power bring forthing companies but the hazard is transferred to the buying companies who have to pay the contracted rates. Most of the province electricity boards in India are buying power through long term contracts and go on to be in a province of fiscal bankruptcy. This long term understandings merely switch the monetary value hazard to the consumer. In India as of now there are no power exchanges where electricity derived functions are being traded.

The above statements indicate that hazard hedge in Indian power sector through electricity derived functions and long term power buying understandings may non be a long term solution.

Weather Derived functions and their effectivity for Indian Power sector

Weather derived functions are instruments used to fudge the conditions dependant hazard, which could be termed as fiscal addition or loss due to variableness in day-to-day climatic conditions. In the power sector the conditions hazard is immense both on demand and supply side as they are dependent on conditions related factors. On the demand side the sum of energy required for both warming and chilling depends on the conditions. Similarly on the supply side the hydro based power workss are dependent on one-year rainfall and snowfall. If the rainfall is deficient there would be less production and in that instance the manufacturers will hold to purchase from the dearly-won topographic point markets to run into up the contractual duty. This is extremely hazardous and therefore the hydro based power manufacturers need a hedge against the conditions hazard. Variation in temperature, rainfall etc means that it would impact the power ingestion. Indian electricity market is extremely regulated with bulk of control related to purchasing and merchandising of power is rested with the authorities hence monetary value hazard in Indian context is non an issue but the volume hazard is a major menace. Weather derivatives offer a executable solution to get the better of the volume related hazard in Indian power sector as it can be implemented without upseting the market construction or by doing immense infrastructural investings. An indispensable demand for trading conditions derived functions is the handiness of accurate historical and current conditions informations which is available at the Indian Meteorological Department. The fiscal market is good developed in India. One of import demand could be developing appropriate conditions based indices, planing pricing mechanism for upwind derivative contracts and educating the participants about the construct. Once regulative barriers are cleared these contracts could be listed on major stock and trade good exchanges of the state where users, manufacturers and other participants may merchandise them. State electricity boards and authorities owned power manufacturers would profit from conditions derived functions. Trading in conditions derived functions would besides convey in a batch of foreign direct investing in power sector as this would be an effectual manner to fudge volume related hazard in power sector. The authorities needs to open the power distribution to private participants to convey in more liquidness and better efficiency.

From above statement it is apparent that the conditions derived functions are a much better hazard fudging alternate as compared to electricity derived functions and long term power buying contracts.

Choice of Appropriate Weather Derivative Contract

A suited conditions derivative contract depends upon the hazard tolerance of purchaser and the marketer conditions they are risk averse or hazard loving and what their outlooks are about the hereafter.

Few basic regulations before choosing a conditions derivative contract:

If the parties are risk averse and wish to avoid paying contract premium so variable conditions hazard can be fixed with a barter contract.

If the parties are willing to take hazard by paying a moderate to high premium and the chance of monetary value hiking is really high so a cap contract can be considered..

If the parties prefer protection from losingss due to monetary value diminution or lower production more than the benefits from the monetary value rise or increased production so a neckband contract is the most suited one.

Swap Contract

A conditions barter can be constructed for a conjectural power manufacturer Hydel limited company if it wants net incomes stableness from lower rainfall, but would besides wish to profit from cold winter conditions without paying a premium.

Barter payout construction

Cap Contract

Assume that a power starves province electricity board wishes to fudge peak burden demand during the summer season. Further, it is assumed that past 20 old ages information reveals that during the five-month summer season there are 5,000 cumulative chilling degree yearss ( CDDs ) , on norm. After analysing the relationship between power ingestion and historical conditions conditions, it is determined that for each CDD above 5,020, SEB ‘s net incomes are affected by Rs. 50,000. Therefore, a conditions cap contract is structured with a work stoppage value of 5,020 and premium of Rs. 5 million.

Cap Contract payout construction

Collar Contract

Collar contract restricts the natural result to upper and lower put boundaries. It is a combination of put and call options. See the instance of a conjectural Counterparty Hydel Ltd. The possible payout profile would be:

Counterparty: Hydel Ltd.

Term: June 2005-May 2006.

Index: cumulative inches of rainfall per twelvemonth, as measured at Station X.

Put work stoppage: 40 inches ( Hydel Ltd. receives below ) .

Call work stoppage: 60 inches ( Hydel Ltd. pays above ) .

Payment: Rs. 10,000 per 1/10 inch.

Put bound: 25 inches.

Call bound: 80 inches.

Premium: No premium.

Collar payout construction