Lockdown Impact

Sector seeks relief measures as power demand and discom revenues plummet

The Covid-19 pandemic is putting a strain on all infrastructure sectors and one sector that has been visibly disrupted is power. The lockdown to curb the pandemic spread has manifested in a sharp reduction in power demand and peak demand. The crisis comes at a time when total demand growth during 2019-20 was already at a significant low of 1.28 per cent. Discoms now face the challenge of paying fixed cost charges for power tied up in PPAs. To avoid this, they claimed force majeure, which private power generators claim is in complete violation of the PPA contract. What has been the impact of Covid-19 on the sector? And what are the measures that have been taken so far to ride out the storm? Power Line presents a round-up…

Sector trends

Demand slowdown: With industrial and commercial activities shut down, peak power demand has declined by more than a quarter from 166 GW in February 2020 to 157 GW in March 2020 and further to 121 GW as of April 28. Energy met stood at 3,030 MUs on March 23, 2020 (a day before the lockdown) and fell to 2,665 MUs by end March 2020 and stood at 2,739 MUs by end April 2020. As per ICRA’s estimates, the demand slowdown amid the lockdown is likely to lead to a de-growth of 1 per cent in electricity demand for the full year of 2020-21.

Discom revenues: Reduction in power demand from high-paying industrial and commercial consumers has had a significant impact on discoms’ liquidity. Revenue losses are estimated to be to in the range of Rs 300 billion as per a recent study by the Confederation of Indian Industry. Apart from a reduction in sales, lower collections from consumers (due to delays in collections, lower collections at cash counters and waivers on payments) are expected to add to their revenue pressure. ICRA projects that the book loss level for discoms at an all-India level could increase by Rs 200 billion in financial year 2021.

To tide over the liquidity crisis, there have been reports that the discoms of Uttar Pradesh, Madhya Pradesh, Punjab, Telangana and Haryana have invoked the force majeure clause for an indefinite period to avoid the payment of fixed charges to gencos. The invocation of force majeure comes at a time when the power generation segment already has significant overdues from discoms (over Rs 929 billion as of February 2020). Gencos are concerned that the force majeure clause is violative of the PPAs and that this would significantly impact their working capital as they need to pay for coal in advance to the railways.

Thermal power plants: The average PLFs of thermal power plants declined to 56.08 per cent in 2019-20 compared to 60.3 per cent in 2018-19. A dip in demand could see PLFs plummeting further. According to India Ratings and Research, PLFs could fall below 55 per cent for financial year 2021, closer to the technical minimum standards.

Coal: Coal production, however, bucked the trend with Coal India Limited (CIL) recording an all-time high production of 84.36 million tonnes (mt) in March 2020, posting a 6.5 per cent growth as compared to the same month a year ago. Coal offtake in March 2020 was, however, 10.3 per cent lower than that in the previous year. This led to stockpiles at CIL accumulating amidst the shutdown. Many thermal plants have requested CIL to regulate coal supplies to them as they are now flush with coal stocks, at almost 50 mt (as on April 28), representing nearly 31 days of stocks.

Power prices: The average price of power in the day-ahead market at the Indian Energy Exchange (IEX) dropped to as low as Rs 2.36 per unit during the period March 24-April 20. The average price stood at Rs 3.08 per unit in February 2020. This has made buying power from the exchanges attractive for discoms. “Distribution utilities are meeting their seasonal demand as well as replacing their costlier generation with low-cost power available on the exchange, thereby optimising procurement costs and saving significantly,” stated Rajiv Srivastava, managing director and chief executive officer, IEX, in a recent press release.

Renewables: Major suppliers of solar photovoltaic (PV) and energy storage equipment in China, South Korea and the US have been hit hard by the pandemic. India alone could see over 21.6 per cent or 3 GW of solar and wind energy projects being delayed due to the nationwide lockdown, according to Wood Mackenzie. For wind projects, supply and labour disruptions in the peak season would be a key concern. Solar PV installations are expected to be hit hard due to supply chain disruptions.

EVs: Covid-19 is also likely to have a ripple impact on the electric vehicle (EV) industry, which is dependent on China for the import of cells, batteries and other components. Globally, EV sales for 2020 are projected to drop 43 per cent year on year, from 2.2 million in 2019 to 1.3 million. In India, the automobile sector has forecasted a 10 per cent slowdown in sales due to raw material shortages in the wake of the outbreak.

Key actions taken by the government and the regulators

Discoms: The payment security mechanism has been relaxed to give support to discoms. The payment security has been reduced by 50 per cent till June 30. Also, the Central Electricity Regulatory Commission (CERC) has cut the late payment surcharge levied by gencos on discoms from 1.5 per cent per month to 1 per cent per month during the lockdown period. The government has approved three-month deferrals to make payments to gencos and transcos. Further, the Power Finance Corporation and REC Limited are reportedly working on a package to offer concessional loans to state discoms with a two-year moratorium in order to help them clear genco dues. The loans would be backed by the state government.

Developers: The Reserve Bank of India (RBI) has allowed companies to opt for a three-month moratorium on loan repayments, which has provided some relief to developers. Recently, Tata Power opted for the moratorium. To provide some relief to thermal power plants, the coal ministry has said that generation utilities can provide CIL with a letter of credit instead of making advance cash payments while continuing to get supplies. Further, the government has declared the lockdown as a force majeure event for renewable energy project developers. Renewable energy developers have received a 30-day extension for commissioning projects beyond the lockdown period. Further, it has directed distribution companies to continue scheduling power from renewable energy sources on a must-run basis.

Consumers: Several state regulators have eased payment terms and fixed charges to help consumers. For instance, the Joint Electricity Regulatory Commission (JERC) has reduced the late payment surcharge and deferred payment of fixed charges by industrial and commercial consumers by three months for all UTs and Goa. Odisha has announced an additional 4 per cent rebate for online payments and allowed provisional billing. In Telangana, consumers are required to pay an amount equal to their March 2019 power bill, while in Maharashtra, the fixed charges of industrial and commercial power users have been postponed for three months. Punjab has relaxed the cost of power for industrial and household consumers and announced interest for advance payments. In Tamil Nadu, consumers have been granted an extension for paying their electricity bill. Uttar Pradesh has announced a waiver on fixed charges for industries. Haryana has announced a Rs 10,000 rebate on fixed power charges for industries. Rajasthan is deferring payment of power and water bills by two months amidst the lockdown. In Uttarakhand, power connections are not to going to be terminated for non-payment of bills during the lockdown.

The way forward

To help the sector cope with the current crisis, more needs to be done, according to industry players. “A specific package for the sector is still awaited. There is a lot of expectation from the package, which is expected soon,” says Sanjeev Seth, CEO, India Power Corporation. He adds that the working capital limits should be enhanced by 25 per cent of the current limits since payouts need to be made for other supplies and services to keep operations intact. Also, he adds that since some states have deferred/waived the fixed charges payable to discoms by consumers, this waiver or deferment of fixed charges should be compensated by the government so that the same can be paid to gencos. “Relief should be made available to both private and public sector companies,” Seth says.

Conclusion

When the lockdown is lifted, the sector could see a bounce-back in demand, but the timing and scale are unclear. It is safe to say for now that Covid-19 has deepened the existing crisis in the country’s power sector. The whole range of consequences for the power sector is yet to be revealed and is difficult to predict; however, it is already clear that demand for energy has dropped, prices have plummeted and negative cash flows of utilities will have a detrimental effect along the value chain.

Reya Ramdev

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