By Ash Padelkar, Senior Research Associate
The electricity sector in India has seen a rapid transformation in the last decade, with demand for electricity increasing by nearly 75% from 2013 to 2023, three electricity exchanges launched, and complex renewables auctions starting in 2018. Together, these factors have laid the foundations for what could be the largest merchant power market in the world.
The complex renewables auctions have made it necessary to build portfolios of oversized assets, which leave uncontracted volumes that are sold in the merchant markets. As the electricity demand grows, the need to acquire renewable energy through these complex auctions has grown. Finally, the establishment of exchanges as well as an extensive range of products within them offer an increasing portfolio of options for producers.
The volume of power traded in exchanges in India has grown to over 121TWh last financial year, which represents a four-fold increase over the preceding decade, or a compounded annual growth rate of 15%. Whilst the Indian power market continues to be dominated by long-term Power Purchase Agreements (PPAs) and OTC trades, which still make up 93% of the total volumes sold in India, the growth in exchange-traded volumes represents a fundamental shift in how market participants will think about investments in India in the future.
This shift can take three forms: first, it creates a new opportunity for producers to sell power directly in this merchant market; second, it offers successful bidders in the complex renewables auctions to sell excess volumes from their oversized assets; and finally, even for those producers intending to sell their volumes in long-term contracts, it represents the opportunity cost of being in that contract or the counterfactual to the long-term contract.
Another crucial aspect of the shift towards merchant power is the pace. The last ten years have seen 15% annual growth – if this growth were to persist, by 2035 India would see nearly 500TWh of merchant volumes. Even if we were to assume that it just remains at the same share of the overall market as today, at 7%, then assuming the Central Electricity Authority’s demand forecast for 2035, the merchant volumes could rise to almost 200TWh. Considering that the capacity procured through complex auctions in 2024 has more than doubled relative to 2023, these merchant volumes are likely to continue increasing.
This makes it vital for all market participants to quantify the value of merchant power and understand the downside risks, which are highly dependent on the technology, location, and configuration of the asset. Aurora’s analysis has found that wind assets in the North region are likely to capture almost 10% additional value compared to those located in the South region. Another emerging risk is that of the DAM prices decoupling between the regions of India. The Central Electricity Regulatory Commission reported that in the financial year 2023/24, there was some decoupling between the North and the South regions. Aurora’s analysis finds that this widens and in the 2030s, the DAM prices differ between the North and the South for more than 10% of the year. Whether a given portfolio of assets can capture the upside or the downside in the market is highly dependent on the portfolio configuration.
Another example of evolving market risk is a solar-wind hybrid asset participating in complex auctions. It might have oversized solar spilling excess generation into the merchant market. To bid competitively in the auction, the developer would need to understand the value that can be captured with the excess generation in the merchant market, as well as the value of the generation from the asset after the duration of the hybrid contract. Aurora’s analysis shows that the realised tariffs for solar in the market could fall by nearly 25% between now and 2030, with the decline continuing beyond as increasing deployment of solar in India under similar contracts means that there is a significant amount of excess generation being traded at increasingly lower costs in the exchanges. This effect is particularly relevant as the Ministry of Power mulls amending the PPA terms for renewable energy projects from 25 years to 15 years, thereby exposing the asset to an additional decade of merchant market prices (or PPAs negotiated based on these prices).
Beyond understanding the risks that are associated with the evolving status quo, investors want to quantify the implications of a downside scenario, as well as understand the upside arising from market shocks and other unpredictable events. Aurora’s India Power & Renewables service offers four scenarios in addition to the Central outlook, covering a range of market outcomes from elevated or depressed commodity prices and technology costs, as well as scenarios exploring the disorderly exit of the Indian coal fleet in the face of financing challenges for energy storage projects, and investigating the impact of a policy-driven acceleration of the energy transition in India.
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