Financiers are optimistic about the power sector’s long-term growth story. However, distribution reforms must be taken up on priority to instill investor confidence in the sector. Leading financiers share their perspective on the current state of the sector, the challenges, and post-pandemic opportunities and outlook. Excerpts…
What has been the impact of Covid-19 on the power sector?
Parminder Chopra, Director (Finance), PFC Limited
The power sector is one of the critical drivers of the Indian economy. The Covid-19 pandemic has had a severe impact on the economy and the power sector, which is usually resilient, is also reeling under its ill effects. Economic and industrial activity was halted due to the nationwide lockdown imposed since March 2020. This affected the entire power sector value chain in terms of reduced demand and a dip in revenue collection, leading to financial distress and disruptions in the power supply chain. But as the economy is opening up and industrial activity is resuming, power demand is gradually picking up. It started witnessing a gradual increase from May 2020 onwards after the easing of lockdown restrictions. As we can see, within just four months of the lockdown being relaxed, electricity demand touched 174.33 GW, surpassing the demand levels in September last year. Thus, demand is getting restored to its normal levels. We expect a positive power demand outlook going forward. Further, the improvement in power demand would effectively translate into better revenue generation, thereby gradually easing the financial crunch being faced by discoms.
Mukul Modi, Executive Vice-President, Project Advisory and Structured Finance Group, SBICAP
Pre-Covid scenario in the power sector: The centrality of the power sector for the industrial and economic development of a country can hardly be overemphasised. Due to a strong focus and policy initiatives by the government, the power sector has added more than 210 GW of generation capacity in the past one decade, involving an estimated investment of over Rs 13 trillion. However, the growth in power demand has failed to keep pace with capacity addition in the past four to five years. As a result, the overall plant load factor (PLF) of thermal power projects has been hovering at 55-62 per cent, indicating underutilisation of assets. Moreover, the sector has been plagued by issues such as the poor financial health of discoms, rising receivables and sporadic fuel supply constraints. Therefore, while the sector achieved success in terms of higher electrification, improved energy efficiency and meeting of power demand before the onset of Covid-19, some discoms remained under financial stress.
Impact of Covid-19 on the power sector: The outbreak of Covid-19 and the consequent countrywide lockdown is a once-in-a-lifetime event with a wide-ranging impact on the power sector. This impact has been in the form of a sudden reduction in demand, financial stress and disruptions in the power supply chain. However, the impact on power generation, transmission and distribution entities has been different.
Distribution: With industrial and commercial activities coming to a halt in the first quarter of this financial year, the demand for power reduced by 25-30 per cent. The situation worsened further due to deferrals of electricity bills to customers and difficulties in collection. With the gradual opening up of industries, electricity demand is now increasing, with annual demand expected to touch pre-pandemic levels by the first quarter of financial year 2020-21. Most discoms are now recording higher online billing and collection.
Generation: The contraction in power demand has led to a decline in offtake and consequently, in the overall PLF of generators. How, the renewable energy sector has fared well compared to the conventional (thermal) sector and most of the decline in power generation appears to have come from the latter. A related development was an increase of 14.5 per cent on a year-on-year basis in electricity volumes traded on the exchange in the first quarter of 2020-21. Another consequence of Covid-19 and its associated issues is significant delays in the resolution of stressed power projects. It is likely to cause further delays in projects under implementation, resulting in time and cost overruns.
Transmission: With reduced power flow across the grid, transmission companies have been registering higher available transmission capacity levels across their interregional and intra-regional links. This, along with the high levels of spare power generation capacity across the country, had resulted in a glut in the secondary power markets during the initial days of the lockdown. However, the situation stabilised as generators withdrew capacities due to subdued demand and offtake from the market.
What has been the industry response to the pandemic?
Covid-19 has led to financial distress in the economy and consequently in the power sector. To mitigate the adverse effects of this, key stakeholders, that is, the government and lending institutions such as the Power Finance Corporation (PFC), are working together to revive the sector. The government is actively taking measures to improve discom health. In a major push to revive the financial health of ailing discoms, the government has decided to infuse liquidity through PFC and our subsidiary REC. The amount is to be disbursed in two equal tranches. The liquidity being infused in the power sector at the grassroots level, that is, the discoms, would help provide sufficient liquidity across the entire power sector value chain.
Further, the Ministry of Power (MoP) and the Ministry of New and Renewable Energy (MNRE) have come up with various measures to ease the operational challenges being faced by various power sector entities. Some of them are a reduction in late payment surcharge, the waiver of fixed charges and interstate charges, and ensuring must-run status for renewable energy generation facilities. Also, the recent privatisation of discoms announced by the government, and the proposed amendments to the Electricity Act, 2003 and tariff guidelines would help strengthen the power sector. The government’s thrust to smart metering is further expected to improve the collection of revenue for discoms, in turn improving their efficiency and that of the entire power sector value chain.
To ease cash flow constraints, the Reserve Bank of India has allowed lending institutions, including non-banking financial companies (NBFCs), to provide a six-month moratorium to their borrowers on all payments falling due between March 1, 2020 and August 31, 2020. PFC has provided a moratorium on around 57 per cent of its dues. This will help ease the liquidity burden on power sector borrowers. Thus, with a plethora of initiatives being taken, the power sector is expected to move forward on the path of revival.
Covid-19 and the consequent lockdown was an unprecedented event which caught most of us off guard. The initial reaction of the power sector was to stabilise the situation. The sudden decline in power demand from the commercial and industrial segments forced discoms to look for optimisation of the power procurement cost.
To help ease the resultant financial stress, the MoP has announced an economic stimulus, providing a liquidity support package of Rs 900 billion for discoms and has reduced late payment penalties for payments to generation companies and transmission licensees. Among other measures, the MNRE has provided a commercial operations date extension of up to five months (that is, up to August 24, 2020) to all renewable energy projects under implementation as on March 25, 2020. The Cabinet Committee on Economic Affairs has also approved a one-time relaxation in working capital limits; this would enable PFC and REC to extend loans to discoms.
What is the investor outlook for the sector?
The power sector has significant potential to grow going forward. On a macro level, India’s current per capita energy consumption (1,181 MW) is about one-third the global average. The country’s population and GDP are expected to grow in the future and energy demand is expected to rise consequently. Further, electrification of villages under the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and last-mile electricity connectivity under the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya) will be two prominent drivers for electricity demand. Under the DDUGJY, 100 per cent village electrification was achieved in the year 2018 and around 99 per cent of households have been electrified under Saubhagya. The completion of Saubhagya is expected to create an additional power demand of about 28,000 MW.
To meet the growing demand, significant capacity addition is expected. Under the National Infrastructure Pipeline for the period 2020-25, around Rs 25 trillion worth of capex requirement has been envisaged for the power sector. The government’s thrust to increase the installed capacity of renewables to 175 GW by 2022 is encouraging for us as it would lead to substantial capacity addition in the power sector space. In addition, infrastructural development in the e-mobility space will provide ample business opportunities. The government’s Atmanirbhar Bharat Abhiyan will also open up new investment opportunities in the sector. Thus, with ample growth potential, the power sector is expected to attract huge investments.
Short-term dips notwithstanding, the medium/long-term outlook for the sector remains robust with the disruption caused due to the Covid-19 pandemic offering interesting prospects. The prevailing Covid-19 situation offers an opportunity to undertake long-term structural reforms to increase investor interest and, in turn, help create a more robust and financially stable sector. This, coupled with the growth prospects of the Indian economy over the next five years, is expected to act as a key driver for the sector.
What will be the key priority areas in the post-Covid world?
Power is considered the backbone of the economy and PFC is the leading public sector financial institution dedicated to power sector financing in the country. PFC is also a key strategic partner of the government for pushing power sectors reforms. In such extraordinary times, where the power sector is facing tremendous stress, the role of PFC as a financial catalyst becomes more pertinent. Therefore, PFC’s foremost priority is to have adequate funding available to ensure liquidity support to the power sector. Providing financing support will not only help in alleviating the stress in the power sector but also help in effectively passing on the benefits of the government’s Covid relief measures to power utilities. The company’s immediate focus is on protecting its bottom line and having a resilient balance sheet so that it is well positioned to operate effectively in the new normal. It is keeping a close tab on the critical parameter of asset liability management position with a specific focus on liquidity. Also, we have enhanced our risk management monitoring and are gradually building our provisioning buffer based on risk assessment. We believe our proactive actions will be a useful hedge against future uncertainties.
Coronavirus is first a socio-economic crisis and then a financial crisis. It has brought a sudden change in the way we live and work, in the process causing stress, fear and anxiety across the spectrum. PFC’s priority is to ensure the continuity of work and the well-being of its employees, who are the success drivers in the organisation. So, for PFC, one of the top priorities is to not only ensure that necessary system and support infrastructure is available to its employees for working efficiently and effectively but also to keep them motivated by being empathetic and ensuring positive engagement to ease the effects of disruption. Besides these immediate Covid priorities, our focus will be on maintaining business growth, exploring new funding areas, and retaining investor trust and confidence in the sector.
Higher operational efficiencies on the generation side, smart grids and network management are being pursued and need to be accelerated. On the policy front, changes to the Electricity Act along with public-private partnership measures for the distribution sector will be critical in improving investor interest and increasing stakeholder confidence. On the financial side, the current low-interest rate regime will make the sector more competitive. The advent and adoption of newer instruments such as InvITs will enable higher monetisation of operational and viable assets. In addition, existing stressed assets on the banking side will need to be resolved. In a nutshell, the power sector needs to become more sustainable, financially strong and operationally efficient to meet the immediate challenges and tap into opportunities in the post-Covid world.