As we are hearing news of coal shortage, which eventually will effect Coal and Power stocks.
I understand bullishness in Coal stocks but I cannot understand bullishness in Power stocks.
My Logic is - Less electricity= Less electricity bill= Less revenue for Power companies.
On that coal prices will increase too, which will lead to high cost of production for Power companies.
Thus it’s a loss loss situation, then why are Power stocks up? Am I missing something?
if there is less electricity the the power companies sell the power at higher price which help in their profits
Does that mean that companies will increase the cost per unit? But we don’t have any news regarding that.
Coal is only a raw material to produce power. Hence having only coal will not help as India has eneough and more.
The logic is shortage of coal will result in increase in price of the output i.e power which is generated by these power companies. Salmon has rightly put this as we have IEX (Indian Energy Exchange) where you can buy power at market price. So states/power consuming companies who quote higher will get the power.
There is cap on it though.
You need to understand the reason for coal shortage first.
Due to pandemic, economic activity had come to standstill and power demand had dropped drastically. As a result lot of power plants were running at low capacity and weren’t making any money. So they also didn’t stock up lot of coal (as power demand was low).
As a result coal India which is major coal producer also reduced production and dispatches.
Now. it seems there is sudden revival of economic activity and power demand has rebounded. To meet this demand power plants has to run at higher capacity, and they are using up their low stock of coal at faster clip. Now reviving production and dispatches takes time, also globally there is coal shortage so import is also not easy. Resulting in coal shortage.
However, most likely coal shortage is transitory and within few weeks (or months) production will increase to meet demand.
So once things stabilize, power plant will be able to continue to run at higher load and make higher profits, and that is what is firing up power stocks.
For most power companies, cost of fuel is pass through so its end user who pays up higher price. Power companies have their returns fixed. ALso they can sell some amount of power in spot market which fetches higher prices.
Typically Power companies sell power to distribution companies, power purchase agreement between then are not generally reported in public domain.
Power distribution company sells to consumer. for which price is fixed (gets published in news) and is revised at periodic interval. SO if ocst goes up, it will come to end user with some delay.
Never ask why. only see the market direction and take decision accordingly. We can’t time the market.
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