Following enactment of Electricity Act, 2003 and introduction of various policies under the act, the concept of Merchant Power Plants (MPPs) was pioneered with much fanfare in the wholesale Indian power market. MPPs – the power plants assuming full market risk for electricity sales – was thought as major competitor to its exact opposite model – long-term PPAs based Independent Power Plants (IPPs) – by the industry experts. The prime drivers behind such favorable market sentiments towards MPPs were an attractive policy and regulatory framework and a persistent peak deficit situation of more than 10 percent. Attractive environment was evident from the fact that a capacity addition of as high as 5000 MW took place within a quick time frame of four years (2007-11) , with power plants having planned capacity of 1000 MW on merchant basis. Another factor which promoted such environment was high short- term market prices ( STM)-average STM prices of INR 7.15/unit with peak time prices as high as INR 19-20/ unit.
However, since then a consistent decline in short-term market prices has been observed with average STM price lying around INR 4/unit. Moreover, continuing trend of congestion in inter-state transmission, and increasing unfavorable policy and regulatory environment (as highlighted in recent fuel linkage policies where MPPs have been denied access to any domestic fuel), has not helped the case of MPPs.
Key Queries Resolved
- Where are the demand pockets for MPPs in India ?
- What would be the best fuel mix to set up an MPP in India ?
- Is the business environment suitable enough to develop Merchant Power Plants in India?
- How much merchant power capacity addition is expected to take place?
- How much proportion of capacity should an independent power producer leave to market forces?
- Will MPPs a profitable venture?
- Would economics of MPPs be viable in the underlying risk dynamics?