Power utilities in India have done their job throughout the Covid-19 crisis by keeping the lights on without interruption. But like players in other industries, they are facing several challenges.
At the beginning of the Covid-19 outbreak, utilities had to meet the immediate issues to keep operations running. Besides ensuring the safety of their people and guaranteeing the security of supplies, crisis teams had to stabilise supply chains and operations, which were disrupted by physical distancing and site restrictions.
A greater challenge was coping with the financial impact of the crisis. Lower commercial and industrial power demand hurt the cash flows and balance sheets of not just the discoms, but upstream players in generation and transmission as well. The government devoted more than Rs 1.2 trillion in stimulus measures, specifically for state discoms to address their cash flow challenges, besides announcing moratoriums on payments for them. For now, power demand has started to recover and is slowly returning to pre-Covid levels; only the demand from the commercial segment is yet to return in full. The trajectory should further improve, say experts, as disbursements under the liquidity infusion scheme pick up.
Power Line takes stock of the key trends and developments in the sector as it recovers from the shock of the pandemic…
Power demand: The imposition of the lockdown to mitigate the impact of Covid-19 led to an overall demand decline of 11 per cent in the first five months of 2020-21 (April to August), over the corresponding period in the previous year. With the gradual lifting of the lockdown and the resumption of certain economic activities, alongside an increase in domestic consumption and rural demand, the monthly power demand reduction has come down from 24 per cent in April 2020 (85 BUs) to 2.1 per cent in August 2020 (111 BUs) over the corresponding months in the previous year. Peak demand, meanwhile, has recovered from 129 GW in April 2020 (versus 172 GW in April 2019) to 167 GW in August 2020 (versus 174 GW in August 2019). That said, overall, there could be a decline of 5-6 per cent in all-India electricity demand in financial year 2021 over financial year 2020, owing to the reimposition of lockdowns, notes ICRA.
Generation and PLFs: Lower demand affected thermal power generation and capacity utilisation factors. During the first five months of 2020-21, thermal generation was 15 per cent lower at 387 BUs compared to 456 BUs during the same period in 2019-20. That said, there was a significant recovery in thermal generation in August 2020, matching the levels recorded last year. In contrast, generation from renewables (which have a must-run status) remained unaffected and posted a moderate decline of 5 per cent during the April-July 2020 period to stand at about 49.8 BUs cumulatively, compared to over 52 BUs during the same period a year ago. Thermal plant load factors (PLFs) declined to 49.13 per cent in April-August from 51.36 per cent a year ago.
Capacity additions higher in financial year 2020: Amidst challenges, the sector added more capacity in financial year 2020 than last year, for both conventional power and renewables. At 7,065 MW, the conventional capacity addition (from thermal, hydro and nuclear) was higher than the 5,671 MW of capacity added in financial year 2019. The conventional power segment did, however, miss its target of 12.1 GW in financial year 2020. For renewables, the capacity addition in financial year 2020 was 8.7 GW, higher than the 8.5 GW added in financial year 2019. This has been the third year in a row since 2017-18 that the renewable sector has added more new capacity than the conventional sector. Going forward, financial year 2021 could see some slippages in renewable capacity additions due to the disruptions caused by the pandemic.
Cash flow pressures: The financial health of the discoms worsened further owing to weak demand from high-paying industrial customers. Putting pressure on the cash flows of power producers, the total dues to be paid by state discoms to generation companies stood at Rs 1.2 trillion at the end of August 2020 – of which Rs 1.09 trillion was owed to non-conventional generators and Rs 109 billion to renewable energy generators – 12 per cent higher than the Rs 996 billion owed in April 2020. This also had a trickle-down effect on coal mining players, with Coal India Limited’s dues from state-owned gencos increasing to Rs 220 billion as of July 2020 amidst lower demand and higher production.
Slide in discom performance: Key discom metrics showed a downward slide. Power Finance Corporation’s (PFC) latest audited figures for financial year 2019 showed that discoms’ aggregate losses increased to Rs 496 billion from Rs 294.5 billion in financial year 2018. The revenue gap (with subsidy received) increased from 30 paise per unit to 52 paise per unit during this period. The aggregate net worth of the discoms was negative at Rs 805.6 billion. The average aggregate technical and commercial (AT&C) losses for distribution utilities at the national level did, however, improve from 22.3 per cent in 2017-18 to 22.01 per cent in 2018-19. In financial year 2021, the revenue gap for the discoms at the all-India level is projected to increase by Rs 420 billion-Rs 450 billion. The sector now has high expectations from a new successor scheme being currently mooted to the Ujwal Discom Assurance Yojana (UDAY). The new scheme aims to cut AT&C losses to 12-15 per cent, eliminate the revenue gap by financial year 2025, and combine existing programmes such as the Integrated Power Development Scheme and the Deendayal Upadhyaya Gram Jyoti Yojana.
Technology focus drives transmission industry growth: The transmission segment remained largely unaffected and showed resilience, as demonstrated during the lights-out event on April 5, when the grid handled the steepest fall and climb in demand in a short span of time. Interregional capacity grew to 102,050 MW in 2019-20. Some key technology milestones for the transmission segment were the commissioning of 11 renewable energy management centres which, apart from forecasting, will help in focused monitoring of renewable plants, and the commissioning of Pole 1 of the important Raigarh-Pugalur high voltage direct current (HVDC) transmission system to facilitate power flow of 1,500 MW from the western region to the southern region.
Solar tariffs drop further: The renewable energy segment reached yet another historic milestone in May 2020. The country’s first tender for providing round-the-clock solar power discovered a tariff of Rs 2.90 per kWh, quoted by ReNew Power for the supply of 400 MW of power. The tariff is 124 per cent lower than the peak tariff discovered in the February auction for renewable capacity with a storage option. ReNew Power’s winning tariff is also 35 per cent lower than NTPC Limited’s average tariff for coal-based power. Another recent auction, which reaffirmed the faith of investors in the renewable power sector despite the uncertainty caused by the lockdown, was NHPC’s tender for 2 GW of solar capacity in April 2020, in which the lowest quoted tariffs of Rs 2.55 per kWh and Rs 2.56 per kWh were registered against the initial tariff rate of Rs 2.78 per kWh.
Short-term market trends: The market recovered fairly quickly from the impact of Covid-19. Monthly volumes traded on the exchanges, which had reported a decline of 7 per cent each in March and April, bounced back by 51 per cent in May 2020 owing to a steep fall in prices, which attracted discoms. Prices in the day-ahead market (DAM) in June 2020 stood at Rs 2.41 per unit, almost 31 per cent lower than those in June 2019. Another highlight during the year was the addition of two new segments – the real-time market (RTM) and the green term-ahead market (G-TAM). The volumes in the RTM, which allows consumers to buy power till just an hour before delivery, comprise 10-20 per cent of the DAM segment. Meanwhile, the G-TAM offers a new, alternative model for renewable developers to sell power in the open market.
Smart metering transformation: Under the Smart Meter National Programme, the sector has a target of installing 250 million smart meters across the country. Covid-19 reinforced the importance of smart meter deployment with notable benefits in billing and collection efficiency, load management, and remote connection/disconnection services. Recently, the Ministry of Power (MoP) began the process of setting up a Rs 20 billion joint venture backed by power majors NTPC Limited, REC Limited, Power Grid Corporation of India Limited and PFC for providing a common backend infrastructure facility to discoms for faster meter roll-outs. The current smart meter penetration in the country is around 6 per cent (for consumers with a monthly consumption of over 200 units).
Stimulus package: As the power sector’s southward trajectory became clear, a massive stimulus package was announced with a series of measures for the sector to avert defaults on payments. Under the Atmanirbhar Bharat package announced by the finance minister, PFC and REC Limited were to infuse liquidity of Rs 900 billion into the discoms in two equal instalments. There were, however, a few states that had hit the UDAY borrowing limit and were thus not able to avail of loans under the Atmanirbhar Bharat scheme. A one-time relaxation in working capital limits for a year was also approved by the cabinet. The package has now been hiked to Rs 1.2 trillion to clear dues for the April-June 2020 period. As much as Rs 730 billion has been sanctioned and around Rs 250 billion has been disbursed to discoms under the package so far. As part of the relief measures, the late payment surcharge rates on delayed payments were also reduced to 12 per cent from about 18 per cent.
Electricity Act (Amendment) Bill, 2020: In April 2020, the MoP issued a draft proposal for amendments to the Electricity Act, 2003, outlining some key reforms. The draft proposed to establish an Electricity Contract Enforcement Authority (ECEA) to decide on matters regarding the enforcement of contractual obligations on the purchase or transmission of electricity. Discoms have, however, strongly opposed the establishment of the ECEA and stated that it would lead to an overlap of functions with those of the MoP, as the draft does not provide a clear-cut differentiation in their respective functions. The proposed amendments have also set aside provisions for distribution sublicensees as parties that obtain authorisation from distribution licensees to distribute electricity on their behalf in particular areas. On this, the discoms have sought more clarity regarding their roles, functions, eligibility criteria, responsibilities, contractual positions, and the regulatory act they would be governed by. Further, the amendments aim to provide for tariffs that reflect the cost of electricity supply and for cross-subsidies to be reduced by state commissions based on the tariff policy. Additionally, the amendments propose that the commissions set tariffs without accounting for subsidies, which would be directly provided to the consumer by the government through direct benefit transfer (DBT). Experts have, however, cautioned that there could be operational challenges in DBT implementation and that it would depend on whether the subsidy is released on time.
Draft Electricity (Rights of Consumers) Rules, 2020: In September, the government unveiled the Draft Electricity (Rights of Consumers) Rules, 2020, which aim to ease the way electricity is supplied to consumers and also offers them a host of other services. As per the draft rules, discoms would be liable to compensate consumers for no supply of electricity beyond a particular duration, interruptions in supply, delays in getting an electricity connection, etc. The idea is to give rights to consumers to seek 24×7 electricity supply at their homes and provide them compensation for any deviation from the stated goal.
Privatisation of discussion UTs and draft SBDs: As part of the stimulus measures, the finance minister announced that the discoms in the union territories (UTs) would be privatised. These discoms reportedly have an enterprise value of around $700 million. Transaction advisers have been appointed and the MoP hopes to complete the exercise by December this year. Setting the ball rolling for the privatisation of discoms, the MoP issued the draft standard bidding documents (SBDs) in September 2020, which serves as a guiding document for the process. The bidding parameter proposed in the SBDs for discoms with medium to high AT&C losses of above 15 per cent is the commitment to AT&C loss reduction for the first five years. For discoms with lower than 15 per cent AT&C losses (or with negligible ACS-ARR gaps), the SBD suggests that the bid parameter may be an upfront premium for equity consideration. Further, the draft proposes that states can opt for 100 per cent equity sales to investors for urban populated areas, with no or limited subsidy on retail electricity tariff. For discoms in the mixed urban-rural populations, the state may look at a 26 per cent shareholding and 74 per cent for private investors.
Emission norms compliance: The overall progress in compliance with emission norms has remained slow. As of July 2020, out of the 169 GW of capacity that was required to install flue gas desulphurisation (FGDs) plants as per the Central Electricity Authority’s (CEA) phasing plan, FGD have been commissioned for only 1.7 GW of capacity and bids stand awarded for 33 per cent of capacity. The Central Pollution Control Board also directed 15 plants (over 14 GW), mostly state owned, to deposit environment compensation for not complying with the December 31, 2019 deadline to limit SOx emissions. Meanwhile, to address the issue of the cost of emission control systems, the Central Electricity Regulatory Commission (CERC) recently floated a staff paper on the issue of a compensation mechanism in cases where the PPAs do not have explicit provisions for such compensation. The CERC had already recognised the revised environmental norms as a change in law event. In another key development, the Supreme Court in July 2020 relaxed the NOx limits for plants that were commissioned between December 2003 and 2016 to 450 mg per Nm3 from 300 mg per Nm3. Also, last year, the environment ministry dropped mandatory washing of coal for supply to thermal power plants (TPPs).
Draft Power Market Regulations, 2020: In a significant development in the short-term power market, the CERC notified the Draft Power Market Regulations, 2020. One of the controversial proposals in the regulations is the provision of a new concept called “market coupling”, which is a process of collecting bids from all power exchanges and matching them to discover a uniform market clearing price through an agency called a “market coupling operator”, notified by the regulator.
National Infrastructure Pipeline: The final National Infrastructure Pipeline report was submitted by the task force to the finance ministry in April 2020. It estimates a capex of about Rs 14.1 trillion for the power sector between 2020 and 2025, for projects identified by the public and private sectors. Of the total capex, about Rs 3,268 billion will be for the generation segment, Rs 3,230 billion for distribution, and Rs 3,040 billion will be for transmission. The remaining will be accounted for by the states. NTPC is likely to spearhead investment in the generation segment with a capex of about Rs 1,200 billion lined up, while state transmission utilities will lead the transmission segment with a projected capex of Rs 1,900 billion.
Equipment import curbs: In July 2020, the MoP issued a directive that called for testing of all parts, components and equipment imported and to be used in the power supply system and network for embedded malware, trojans, etc., as well as for adherence to Indian standards. Prior to this, at the state power ministers’ conference, the power minister highlighted the need for self-reliance and stated that India would not import power equipment from China, saying that the sector, being strategic and essential, is particularly vulnerable to cyberattacks. As per the MoP’s estimates, India imported Rs 710 billion worth of power equipment, Rs 210 billion worth of which was from China, in financial year 2019.
Commercial coal mine auctions: Last year saw the roll-out of a key reform that is expected to open up an important sector to competition. The commercial coal mining auction process kicked off in August 2020 with 38 mines being put up for sale. The auction process follows the Cabinet Committee on Economic Affairs’ earlier decision to award coal and lignite blocks on a revenue sharing basis. There will be no restriction on the sale and utilisation of coal from these mines. However, there was little investor appetite for the blocks on offer, due to environmental concerns and low margins. Only 23 blocks received bids (82 bids), with the remaining 15 finding no takers.
Shutdown of old plants: In the Union Budget 2020, the finance minister announced that utilities would be urged to shut down old TPPs that generate higher carbon emissions than the stipulated limit. The land thus vacated would be put to alternative use. A study carried out by the CEA in 2015 showed that the total coal-fired capacityof TPPs that are more than 25 years old is around 34,280 MW, of which about 20,000 MW lies in the state sector, 12,830 MW in the central sector, and 1,450 MW in the private sector.
Despite the positive early signs, experts say that power demand may not recover fully before the end of 2020. Further, with states wanting to protect consumers, they might choose to keep tariffs low for the foreseeable future, further depressing revenues for the cash-constrained discoms. The extent, pace and trajectory of the economic recovery will ultimately determine how these challenges play out. However, the Covid crisis is certain to accelerate multiple trends that were already shaping the sector before the pandemic struck, including the increased use of digital technologies, smart metering, and a continued shift towards renewables and emerging business areas. n