Merchant misery: Why green power is finding little love on power exchanges

Depressed solar energy prices are weighing on installed and upcoming merchant power totalling 3 giga watt (GW), three people aware of the matter said. Merchant power refers to electricity that is sold on exchanges or through short-term contracts rather than long-term agreements. Companies including Adani Green Energy Ltd, ReNew Energy Global Plc, Acme Solar Holding and Statkraft AS have invested around ₹15,000 crore in such projects.

On electricity exchanges, green energy prices have declined over the last few years. This year, prices averaged at ₹3.78 per unit, against ₹4.24 last year, and ₹5.25 the year before. Over the past one month, it averaged ₹2 a unit, even hitting zero at the end of May. In the day-ahead market, the average market clearing price (MCP) in May was ₹1.86 per unit, and so far in June, it has averaged ₹1.82 a unit.

Green power, especially solar power prices have declined in the past few years due to increase in capacity addition and resultant higher supplies.

Cloudy days

The chief executive of one of the renewable energy companies mentioned above said: “We have to be careful about selling our merchant solar power, because daytime prices are beginning to go down. So, we have to be careful about not having too much merchant exposure or having any merchant exposure for that matter. You have to look at the prices, day-time prices especially in May...because demand was very soft, therefore daytime power prices were quite low."

To be sure, this year's summer was less harsh, and the early arrival of monsoon cooled demand for power in several parts of the country.

Now is not a favourable time to venture into merchant solar capacity, the chief executive cited above said on the condition of anonymity. "I think building a solar merchant plant now in the context of all the solar capacity that is going to come up -- I don't think that's a very smart decision to take."

Last year saw higher capacity addition and subdued demand growth, an industry executive said, “This supply-demand imbalance has led to a softening of market clearing prices across power exchanges."

Unsustainable prices

Experts said the price of around ₹2 is not sustainable, and prices staying subdued for long would hurt.

Sambitosh Mohapatra, partner and leader, climate and energy, PwC India said, “Companies typically oversize when they win large contracted capacity if connectivity and land parcel is available to leverage scale benefits and benefit from merchant trade. Based on the green day-ahead market prices, the return expectation would be impacted. It depends on granular demand analysis and outlook but shift to short to medium-term bilateral contracts can be seen."

To be sure, merchant power accounts for a smaller share of power generators' overall sales. The bulk of their sales come from long-term power purchase agreements with utilities.

An Adani Green Energy investor presentation for FY25 showed that 14% of its overall power sales was through merchant capacity, which would account for nearly 2 GW of its total installed capacity is around 14 GW. It also supplies to merchant buyers from its Khavda RE park, the largest renewable energy park in the world.

Meanwhile, merchant capacity at ReNew stands at around 600 MW, out of its total green energy portfolio of 18.5 GW. Acme Solar Holdings' 300 MW merchant solar plant at Sikhar is planned to be operated under a newly won PPA and would supply power to discoms, according to its investor presentation. Its total installed capacity is over 6 GW. Macquarie-backed Blueleaf Energy is also developing 200 MW merchant solar capacity at its Pachora wind-solar hybrid project in Maharashtra, which is expected to be commissioned this year.

Battery energy storage systems (BESS) that store power generated during the day for release later, as well as the debut of electricity futures trading in India, could help companies struggling with low prices, experts said.

Queries sent to the spokespersons of Adani Green Energy, ReNew, Stratkraft on Wednesday morning remained unanswered till press time.

A Blueleaf spokesperson said: "As an independent power producer, we offer all of these and for our upcoming project due for commissioning later this year that has a merchant component, we have also issued long-term IRECs (International Renewable Energy Certificate), which will serve as somewhat of a hedge against market volatility risks." The spokesperson added that Blueleaf's first plant in India is yet to be commissioned.

With the government mandating BESS in upcoming tenders, a structural shift is expected, said Rahula Kumar Kashyapa, chief commercial officer, Acme Solar. “This will enable excess solar generation during peak periods to be stored in energy storage systems rather than being offloaded in the merchant market or power exchanges. This may ensure that price of solar power may not fall much, as generators will have an option of storing the low-cost energy, which in turn can be sold during the peak hours, when the realisations are better," he said.

Breakeven blues

The breakeven tariff for new solar projects is Rs. 2-2.1 per unit, said Vikram V, vice president & co-group head, corporate ratings, ICRA Ltd, adding in the last one month, daytime prices have been below this level. “While prices have increased in the evening and late night hours, this would not help solar power projects as their generation is during the day, and as such, these projects do not have any storage capacity currently."

Vikram noted that in the past 12 months, merchant solar projects have grown, as lenders started financing such projects seeing the prospects of renewable energy. The key risk for these projects remains the exposure to volume and tariff risks in the merchant market, as seen in the last month or so, Vikram added.

Sustained low prices in the exchange market could become a serious concern for both developers and lenders, said Jatin Arya, director at CareEdge Ratings. Supply-side liquidity refers to the availability of sell orders or supplies, thereby meaning higher supplies would weigh on the prices.

Way forward

"Developers who set up projects without power purchase agreements (PPAs) to capitalize on strong short-term rates in recent years may now face challenges. However, these projects benefit from full ISTS (inter-state transmission system) waiver if commissioned before 30 June, 2025. They could also find some relief through bids similar to the recent SECI bid, such as the 500 MW Tranche XIX tender, which requires commissioning before June 2025 end as buying discoms favour assets which have complete ISTS exemption for 25 years," Arya said.

In March, the Solar Energy Corp. of India (Seci) floated a tender for PPA of 500 MW power ISTS-connected solar projects which are commissioned before 30 June, 2025; so, some of the merchant capacity could explore PPAs under this route.

Electricity futures, which is yet to pick up in India, by merchant solar capacity could help too.

Harish Ahuja, head of sustainability, power and carbon markets and listing at NSE said, "Futures trading would be a viable and stable option for merchant solar capacity. There could be several merchant solar players who are now looking at trading through the futures market. This would give better price discovery, visibility and stability to their cash flows." He noted that NSE would be launching quarterly and yearly futures products in phases subject to regulatory approvals.

Experts and industry stakeholders said that integrating battery energy storage systems can enhance project viability by enabling temporal shifting of generation and capturing peak price differentials. A forward-looking strategy would involve evaluating storage pairing, exploring hybrid configurations, and actively participating in emerging ancillary and capacity markets, they said.

Mint earlier reported that demand in top industrial states has declined in April and May and big tech firms like Meta, Amazon and Microsoft are incurring losses on their green energy power purchase agreements (PPAs) that are based on contract for difference (CfD) due to low power prices.