From a sharp decline in electricity demand to bottlenecks in revenue collection by discoms and payment delays to gencos and transcos, the sector has faced unprecedented challenges across segments. While demand has been improving in recent months, complete recovery and sector growth may still take some time. The sector is likely to see a greater shift to renewables, digitalisation as well as structural reforms to make the industry more robust in the post-Covid scenario. Power Line presents the views of leading consultants on the impact of the coronavirus on the sector and the future outlook…
What has been the impact of Covid-19 on the power sector?
Anish De, Partner & National Head, Energy Natural Resources & Chemicals, KPMG India
The lockdown imposed from March 21, 2020 onwards led to a sharp fall in peak and energy demand. In the first week of the lockdown, demand dropped to about 30 per cent as non-essential industries and commercial establishments (responsible for 50 per cent demand share) were shut down. The first quarter of 2020-21 witnessed a demand erosion of about 53 BUs, which translates into 4 per cent of the annual energy demand.
Coal-based thermal power plants were backed down in response to the demand reduction, since renewable energy and nuclear are must-run and hydro supports more peaking load. Interestingly, while demand has recovered to pre-Covid levels, the share of coal-based generation has not bounced back to the same levels, owing to subdued industrial as well as power sector demand.
Electricity supply has remained uninterrupted, being an essential service. However, the discoms are facing headwinds due to a steep fall in revenue and collections during the lockdown. It is estimated that the cash deficit could lead to discoms’ debt hitting an all-time high of Rs 4,500 billion at the end of this fiscal.
Ajay Mahajan, MD & CEO, CARE Ratings
The lockdown and its subsequent extensions imposed to stem the spread of the Covid-19 pandemic have severely impacted economic activity in the country. Notwithstanding the classification of public utilities (such as for power generation, transmission and distribution) as essential services, the sector suffered a significant reduction in power demand. On the generation side, the must-run status of renewable companies ensured that they were least affected, while thermal power generators bore the maximum brunt as demand plummeted. As per a Central Electricity Authority generation report, the all-India plant load factor (PLF) of thermal plants declined to 48.46 per cent in April-August 2020 from 59.17 per cent in the corresponding period last year. On the distribution side, although the lockdown has eased over the months, commercial and industrial (C&I) activity has not picked up as expected. The resultant lower sales to high-tariff C&I customers have affected the discoms negatively, leading to an increase in subsidy requirement and high aggregate technical and commercial (AT&C) losses.
Impact on power demand and demand pattern
- Demand dropped about 20 per cent on a month-on-month basis during the April-May lockdown period. Demand from the industrial and commercial segments dropped by 25 per cent, while demand from the household segment increased by 10 per cent. The impact was also visible in the change in demand from individual states, wherein states with higher shares of industrial load saw larger drops in demand (for example, Maharashtra, Gujarat, Tamil Nadu). The unlock period (June 1 to August 31) saw a steady increase in demand, with the industrial and commercial segments also contributing to this increase. Compared to August 2019, electricity demand in August 2020 was just 2 per cent lower.
- The pan-Indian load shape witnessed a “peakier” load pattern during the morning and evening hours. These curves are typical of patterns with higher demand from the household segment.
- Discoms were already experiencing heavy financial losses, and Covid-19 only exacerbated the situation. The pandemic resulted in demand shifting from a well-metered, low AT&C loss level and high-paying consumer set that subsidised other consumers (that is, C&I), to a consumer set that is not so well metered, has high AT&C losses, relatively low paying capacity and is highly subsidised (household and agriculture). The shift in demand, therefore, resulted in higher revenue losses for every unit of electricity sold by discoms. The unpaid dues from discoms grew from Rs 1,050 billion (in March 2020) to Rs 1,320 billion (in July 2020), an increase of 25 per cent.
- The burgeoning cost burden on discoms could potentially lead to a collapse of the whole supply chain. Therefore, the central government has announced that discoms will be offered liquidity support of Rs 900 billion under the Atmanirbhar Bharat package. The package is expected to give a much-needed boost to discoms and will enable them to continue to function smoothly and pay generators for power procured.
Impact on renewable energy generation/capacity addition
- Covid-19 and the consequent lockdown had an unprecedented impact on the overall economy and the renewable energy sector in particular. The renewable sector has already seen a significant loss in growth momentum over the past two years. Capacity additions have slowed down considerably from the high achieved in 2017 (of 15 GW year on year). The past two years have seen less than 10 GW of year-on-year additions. Further, with nearly 85 per cent of the total solar installations being dependent on panels and inverters imported from China, there have been significant delays in project implementation owing to supply chain disruptions due to Covid-19. So far, India has been able to add only 4 GW of total renewable capacity and is expected to add a total of 6-8 GW against a target of 20 GW this year.
Impact on coal plants and coal supply
- Lower electricity demand led to the idling of a significant amount of capacity. The average PLFs of thermal plants fell by about 10 per cent (averaging 48 per cent in the April to August period). Since the impact of Covid-19 and the lockdown was felt mostly in large cities, no significant impact was observed on coal supply. The impact of continued supply of thermal coal was also observed on prices on the power exchanges. These prices fell by 26 per cent for the period April to August, compared with the same period last year.
Impact on gas supply and gas power plants
- LNG prices saw a sharp drop (especially for spot purchases). These prices dropped by 41 per cent during the period February-August 2020, as compared to the same period in 2019. For Indian gas-based power plants, this represented a unique opportunity. Spot LNG consumption by power plants averaged 10.4 mmscmd for the period February-August 2020, with a high of 12.5 mmscmd in June 2020, as against a “business as usual” consumption of about 3.5 mmscmd.
Delay in implementation of environmental retrofits on thermal plants
- The Ministry of Environment, Forest and Climate Change (MoEFCC) had, in 2015, announced new standards to limit the concentration of sulphur dioxide (SO2), nitrogen oxide (NOx), particulate matter (PM) and mercury in stack emissions for coal-fired power plants. However, even by December 2017, very few plants had complied with the norms and the deadline was extended to 2022. Recently, the Supreme Court rejected a request by power producers to extend the deadline for installing the equipment to cut emissions by two years to 2024. However, the order implied that a case-by-case review could be made after analysing project-specific facts. The plants that were expected to install control equipment during 2020-21 may get an extension of a couple of years due to disruptions caused by the Covid-19 pandemic.
What has been the industry response to the pandemic?
The government has announced an economic stimulus package providing some liquidity relief to discoms. Earlier, the regulators had rolled out some measures aimed at providing relief on payments to end consumers as well as discoms. Additionally, by granting must-run status to renewable power, the Ministry of New and Renewable Energy (MNRE) has supported the power sector in these challenging times.
Some of the measures are as follows:
- The MNRE has acknowledged Covid-19 as a force majeure event and issued guidelines to the implementing agencies for extension of project deadlines for five months.
- The government and the regulators have provided relief through measures such as a six-month moratorium on debt service, a rebate in the late payment surcharge (LPS) and a Rs 900 billion capital debt infusion. However, the relief measures may not be sufficient as they do not provide adequate liquidity for discoms.
- Discoms and state regulators have offered relief to consumers who have been hit hard by the pandemic, through the deferment of due dates, curtailment of disconnections, waiver of fixed charges, rebate in LPS and other such measures. Many states have also abstained from tariff hikes in the annual tariff-setting process for 2020-21.
- The Covid-19 crisis has brought to the fore, the risks associated with overdependence on international supply chains and the importance of localisation. The government has centred the stimulus measures on self-reliance (atmanirbharta) and put emphasis on supporting domestic manufacturing, especially for micro, small and medium enterprises.
- It has introduced the National Infrastructure Pipeline, which envisages a Rs 23.4 trillion public-private investment across the power sector to help jump-start the economy.
As a response to the pandemic, various state governments have announced the deferral of power bills and waiver of fixed charges to various consumer categories in order to negate the impact of lockdown-related restrictions. While a few states have waived fixed charges for select consumer categories such as industries and shopkeepers for a month or two, others have allowed the deferment of electricity bills without payment of LPS. Moreover, in a bid to provide support to the discoms, the central government decided to waive fixed charges and interstate transmission charges for power not drawn from public sector units during the lockdown. Additionally, the Central Electricity and Regulatory Commission announced the lowering of LC/advance payment requirements under the payment security mechanism by 50 per cent, coupled with reduced LPS at 12 per cent (as against 18 per cent earlier), applicable on payments due beyond 45 days from March 24, 2020 to June 30, 2020.
The power industry has been hit quite hard due to the pandemic and the lockdown. The large-scale disruption in supply chains, delays in equipment supply, shortfall in labour availability, etc. have led to a considerable slowdown in overall economic activity. However, the industry has been bolstered by the government’s initiatives in various segments.
- Opportunities in the discom segment: The Covid-19 pandemic brings very important lessons for discoms in terms of the implementation of IT, internet-enabled metering, billing and collection and a rationalised tariff structure for retail consumers. This requirement of discoms will open up numerous opportunities for industry and market consultants to implement these changes. Some positive outcomes are already visible in terms of the efforts being made by states to increase private sector participation in discoms, either by promoting distribution franchises or discom privatisation.
- Advent of domestic manufacturing: Disruptions due to Covid-19 and changing relations with China have created new opportunities for domestic manufacturing (in the energy and non-energy segments). There is mounting pressure on the government to move away from Chinese investments. The government has already indicated its intentions by announcing various policy measures to support domestic manufacturing/production, such as the imposition of safeguard duties on solar imports for another year and increasing the priority sector lending limit to the renewable energy sector. The government has adopted atmanirbharta or self-dependence as a key plank in its Covid-19 policy relief package, wherein solar manufacturing has been identified as a policy priority. In the coming years, the focus for the renewable energy sector would be on developing capacities for domestic production of various equipment.
- Opportunities for investors: There are significant opportunities for investors in the power sector, especially in renewable energy. There is huge optimism about the prospects of renewable power in India, with the crisis refocusing the attention of governments and policymakers worldwide on climate change and localised energy supply. Both of these priorities play to renewable power’s advantage.
What is the outlook for the sector?
In the post-Covid era, a few shifts are clearly visible. These include:
- Transition to renewable energy: Due to Covid-19, the world has witnessed that energy systems can exist without coal-based electricity. The cost of building renewable capacity (capital cost) has also become lower than that of building a thermal project. In the medium to long term, we expect to see a focused shift from coal-based energy towards renewable energy on account of policy pushes, better economics and climate change initiatives. In the recent bids for supplying round-the-clock (RTC) renewable energy, a competitive first-year tariff of Rs 2.90 per unit was discovered, which will further increase pressure on thermal-based plants.
- Localised manufacturing and supply chain infrastructure: Till now, the focus on domestic content/localisation has been largely limited to policies that penalise imports (through taxes and duties) and mandate the procurement of a certain percentage of domestic content by government agencies. However, with the manufacturing push in India, the focus will be on remaining free from international supply chain issues. This will require comprehensive reforms focused on reducing the hurdles for new businesses in terms of licences, permits, financing, labour laws, taxation, land acquisition, etc. In addition to ease of doing business, the focus should also be on skill development to prepare the workforce to meet future needs.
- Power market reforms: The launch of the real-time market (RTM) on June 1, 2020 is expected to improve the balance of demand and supply of electricity flowing through the grid and help bring down the cost of power. The government has also introduced the long-awaited Electricity (Amendment) Bill, 2020, electricity futures, and the green term-ahead market in a short period of time.
Power demand fell by a good 20 per cent in the initial period of the lockdown and has still not bounced back to its pre-Covid levels. Power demand is expected to be subdued for the rest of the year and will affect the PLFs of thermal power plants by 5-7 per cent on an annual basis. Generation companies that rely on the merchant market are likely to be affected more, given the double whammy of subdued demand and depressed spot prices, which are now around Rs 2.50 per unit as compared to Rs 3.30 per unit in the previous year. The outlook for discoms continues to be negative, given the lower demand from C&I consumers coupled with a lockdown-induced reduction in billing and collection efficiency. This is likely to lead to higher AT&C losses on a full-year basis. Also, lower sales to subsidising segments and relatively higher sales to the domestic segment are likely to increase discoms’ dependence on the state government for tariff subsidies. These factors have affected the liquidity profile of the discoms.
- Tepid response to coal-based generation and capacity additions: Investments in coal are expected to continue to remain low, especially after the tepid response to coal mine auctions. The focus is expected to shift from coal towards clean coal technologies and carbon capture, that is, towards clean, green and sustainable energy. The pandemic has only strengthened the resolve and will act as a catalyst for inevitable change.
- Renewable energy capacity additions to pick up in the medium-to-long term: For renewable energy, in the medium-to-long term, the capacity addition situation is expected to improve and it is expected to regain the required pace. If there are no further Covid-19-related setbacks, a steady improvement in construction activity is expected and it may take another six months to recover to its pre-Covid-19 levels. Forecasts suggest that India is expected to add 15-20 GW of renewable energy capacity year on year in the next three to five years. The aggressive capacity additions will be driven by the development of capacity that has already been awarded in the past one year; the development of capacity that has already been committed by developers; and a push by the central government to meet the intended renewable energy target of 175 GW by end 2022.
- Storage in the form of BESS: With falling costs of chemical storage batteries and increasing penetration of renewable energy, battery energy storage systems (BESS) will become a necessity, either as an independent service provider or along with generation. A number of recent studies undertaken by ICF indicate a significant amount of BESS additions in the Indian power grid, mostly coupled with renewable generation. The development of ultra-mega solar and hybrid parks would also support BESS installations.
- Renewable energy integration using BESS and gas: Apart from BESS, gas-based generation is expected to play a vital role in renewable energy integration. With the falling price of LNG, globally, gas-based generation has now become a viable option for managing the intermittencies and variability in renewable energy-based generation. Gas plants, being highly flexible, will offer the required support to the grid for managing reliability.
What will be the key priority areas in the post-Covid world?
Although demand has been recovering gradually with the resumption of economic activities, there is uncertainty about the time needed for full recovery and growth thereafter. Thus, stronger measures are needed to speed up recovery and improve the resilience of the power sector amidst the new normal. These interventions need to focus on:
- Stronger financial stability: The government has rolled out a liquidity infusion package as a part of its economic stimulus. This amount could possibly help meet the pre-Covid dues (Rs 945.99 billion as of March 2020) and not the expected future deficits. It is necessary to infuse further liquidity in discoms, commensurate with their respective cash deficits, to ensure uninterrupted and reliable supply of electricity and to safeguard the power system value chain.
- Continued green growth transition: In the post Covid-19 scenario, power demand could return to normalcy but is likely to still be lower than supply. With the overcapacity scenario, the choice will be between an increase in renewable capacity addition and a reduction in coal-based power PLFs. In this scenario, investors and buyers require a clear trajectory or a road map for renewable capacity addition, as well as risk mitigation measures to ensure progress towards creating a sustainable energy system.
- Sustained reforms: The power market reforms agenda needs to continue, as deep power markets can help in not only bringing greater efficiency in the sector but in assisting renewable energy integration, thereby accelerating the pace of energy transition in the country.
- Grid modernisation: The Covid-19 pandemic and the resulting demand drop have shown the importance of flexible and adaptable power assets. However, investments will be required to build smarter, flexible and responsive grids that ensure uninterrupted availability of critical services such as electricity. We need comprehensive planning for grid modernisation, aligned with green growth targets.
- Consumer-centricity: The Deendayal Upadhyay Gram Jyoti Yojana has enabled grid connectivity, and Saubhagya has enabled last-mile connectivity to the poorest of households. The next phase should be to enable 24×7, reliable power supply. Utilities must now focus on customer-centricity, as customers would appreciate an omnichannel interface, easy accessibility to customer care services and personalised services.
- Building resilience: A resilient electrical grid is important as it ensures that the sector is insulated from natural disasters, technological threats and pandemics, thereby limiting the impact on the economy and the people. Thus, it is imperative to develop and implement integrated planning approaches that hinge on a holistic view of demand-supply aspects, affordability, environment, ease of access, resilient system infrastructure and consumer services.
The nationwide lockdown, followed by localised restrictions, has constrained the discoms’ ability to efficiently and reliably deliver power to its consumers. Moreover, restrictions on the movement of staff have hampered timely O&M of distribution infrastructure and slowed down their capex plans. Lockdown-related restrictions have also materially impacted the collection efficiency of the discoms. In this context, the key priority areas for discoms in a post-Covid world would be restoration of their billing and collection abilities, followed by resumption of their capital expenditure plans.
While it has been the constant endeavour of the discoms to improve billing and collection efficiency, there is an expectation that in the post-Covid era they will accelerate and adopt technology in day-to-day utility operations that will lead to reduced human intervention. Further, structural reforms in the sector should be fast-tracked. The recent government announcement of privatisation of discoms in the union territories is a welcome move. While such a step is being pursued, the central government must proactively engage with the states to facilitate private participation through available ways, including the distribution franchise model.
Clean, green, and sustainable development
Post Covid-19, it is likely that the world will embrace sustainability goals and follow the path of waste reduction. With most economies looking at locally available resources, there is an opportunity to maximise economic gains by promoting activities pertaining to resource efficiency, material circularity, waste minimisation and waste-to-energy conversion. The country can support appropriate business models through various national and local initiatives.
Building a resilient system:
The theme, post-Covid-19, is expected to be of developing a resilient system (operationally and financially). Covid-19 has exposed some financial weaknesses within the discoms, as is evident in how the skewed retail tariff resulted in higher financial losses for every unit of electricity sold during the pandemic.
Decarbonising and reducing the environmental impact:
- There will be a move away from liquid fuels in mobility, with battery electric vehicles (EVs), fuel cell EVs and green fuels such as hydrogen expected to drive the future of mobility.
- There will be a focus on industrial decarbonisation by reducing carbon dioxide emissions through the utilisation of multiple options of energy efficiency, electric production of heat, use of hydrogen and biomass as feedstock or fuel, and carbon capture.
- There will be efforts to maximise the use of renewable energy sources, especially solar, via the deployment of BESS and hydrogen as storage.
Digital transformation and cybersecurity will be key for sustained operations at all levels.
Innovating and diversifying revenue options: Businesses can consider looking beyond conventional ways of operation or revenue options and think about diversifying their business operations and innovating to connect with their end consumers.