The lockdown following the outbreak of the Covid-19 pandemic, which significantly slowed down economic activity in the country, has had a profound impact on the power sector. There are visible signs of strain in the sector which witnessed a deep cut in power demand, especially from high-paying commercial and industrial (C&I) consumers, financial stress and disruptions in the supply chain. Specifically, the distribution segment that was already reeling under heavy losses witnessed further liquidity constraints, owing to lower demand from high-tariff consumers and delays in cash collection. This has disrupted the entire power sector value chain, with gencos and transcos witnessing significant delays in payments from discoms. Discoms have also declared force majeure to gencos, further impacting payments to power producers. The government’s relief efforts so far have been focused on the distribution segment, with a Rs 900 billion liquidity infusion scheme announced for discoms under the AtmanirbharAbhiyan package announced earlier.
Indian Infrastructure provides a snapshot of the impact of Covid-19 on the power sector, the response so far and future outlook…
Impact on the power sector
- Power demand: The decline in demand primarily came from C&I consumers, while domestic power consumption witnessed an increase (residential load increased by 25-30 per cent during the lockdown according to Prayas). In the April-June quarter of 2020-21, power demand witnessed a decline of 16.2 per cent over the corresponding period of the previous year. However, with the gradual lifting of the lockdown, demand recovered from a year-on-year decline of 22.5 per cent in April 2020 to a 10.9 per cent decline in June 2020. Meanwhile, in July 2020, the all-India electricity demand stood at over 96 per cent of the pre-Covid level and further improved to close to 98 per cent of the pre-Covid level in August 2020. According to ICRA, recovery in electricity demand was mainly seen in the northern and eastern states with a year-on-year increase in demand of 6-13 per cent in July 2020. This was mainly driven by rural consumption, while demand in large industrial states witnessed a 6-15 per cent decline, on the back of slower recovery in industrial activity. Also, the recovery in demand in August 2020 is on a lower base, considering the demand decline witnessed in August 2019. The decline in power demand, however, has not been uniform across the country, with states such as Uttar Pradesh and Bihar witnessing a slight increase in net power demand. Another key trend with regard to power demand has been the change in the load curve, as a result of a change in the electricity consumption pattern with the emerging trend of work from home.
- Power generation and PLF: Thermal generation took the greatest hit with renewable energy generation remaining largely unaffected owing to the must-run status granted to the segment. Within the thermal power segment, the decline in generation has been primarily from the more expensive and inefficient plants. In 2020-21 (April to July), thermal power generation witnessed a decline of 17.8 per cent over the corresponding period of the previous year. The decline in thermal power generation was as high as 29.4 per cent in April 2020. However, there was only a marginal decline of 2 per cent in July 2020. The plant load factor (PLF) of thermal plants also deteriorated significantly. During April-July 2020-21, thermal PLFs stood at 48.3 per cent, recording a decline of 13 percentage points over the corresponding period of the previous year. Subsequently, coal offtake from Coal India Limited and its subsidiary companies also witnessed a decline of 18 per cent over the same period.
- Discom finances: The fall in power demand especially from C&I consumers and delays in cash collection from other segments has impacted discom finances. The widening revenue gap of already cash-strapped discoms has impacted their ability to pay the generators. As per the Ministry of Power’s PRAAPTI portal, the discoms’ overdue amount as of June 2020 stood at Rs 1,192.12 billion, as against discom dues of Rs 728.53 billion as of June 2019. Further, another fallout of the pandemic has been that a number of discoms have invoked the force majeure clause under their power purchase agreements (PPAs), claiming exemption from the obligations of purchasing power and making the necessary payments under the PPA.
- Renewable energy capacity addition: Major suppliers of solar photovoltaic 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. Disruptions in the supply chain and project execution during the last quarter of 2019-20 impacted domestic solar capacity addition during the previous fiscal year as well.
- Short-term power price: There has been a significant decline in the price of short-term power at the exchanges owing to robust sell-side liquidity. The average monthly clearing price discovered at the Indian Energy Exchange between March and July 2020 was in the range of Rs 2.35 (June 2020) to Rs 2.57 per unit (May 2020). The first quarter of 2020-21 witnessed an increase of 14.5 per cent on a year-on-year basis in electricity volumes traded on the exchange.
Sector response
- Liquidity infusion: One of the key measures announced to mitigate the impact of Covid-19 on the power sector is the Rs 900 billion liquidity injection for discoms, under which loans would be given by REC Limited and Power Finance Corporation (PFC) Limited, aimed at clearing discoms’ liabilities to gencos. So far, loans aggregating Rs 680 billion have been sanctioned under the package. Uttar Pradesh tops the chart for seeking the highest credit under the package at Rs 200 billion followed by Telangana (Rs 120 billion) and Karnataka (Rs 70 billion). The central government is considering enhancing the package size to Rs 1,250 billion to cover losses up to June 2020, as against March 2020 covered earlier. Recently, the Cabinet Committee on Economic Affairs has approved a one-time relaxation in working capital limits (this was earlier 25 per cent of the previous year’s revenues under UjwalDiscom Assurance Yojana) which will enable PFC and REC to extend loans to those discoms that were not eligible for getting loans under the package. Meanwhile, under the AtmanirbharAbhiyan package, some key structural reform moves were also announced for the sector including the implementation of the new tariff policy and privatisation of discoms in union territories.
- Other measures: The Ministry of New and Renewable Energy (MNRE) has provided a blanket 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 extension will be given to developers without any case-by-case examination, and will be applicable to all renewable energy projects under implementation through agencies designated by the MNRE or under various schemes of the ministry.
- Other key measures taken to mitigate the impact of Covid-19 include a reduction in payment security extended by discoms to gencos by 50 per cent (up to June 2020), reduction in late payment surcharge levied by gencos on discoms, and a three-month deferral for discoms to make payments to gencos and transcos. Several state regulators have also eased payment terms and fixed charges to help consumers. Besides this, the Reserve Bank of India has allowed companies to opt for a three-month moratorium on loan repayments, which has provided some relief to developers.
The way forward
As per ICRA Research, during 2020-21, the all-India electricity demand is likely to decline by 5-6 per cent over the previous year, assuming a demand decline of 3.5-4 per cent in the second and third quarters and a marginal recovery of 1 per cent in the fourth quarter of 2020-21. Subsequently, the revenue gap for discoms at the all-India level is estimated to increase to Rs 420 billion-Rs 450 billion in 2020-21. Notably, the recovery of revenue, if allowed through regulatory assets, would require a tariff hike of 2.5-3 per cent at the all-India level, assuming a three-year recovery period of regulatory assets.
In the thermal power segment, the yearly PLF is likely to remain suppressed. As per ICRA, during 2020-21 the all-India PLF is expected to be 50-51 per cent, which will bring the PLF of thermal power plants closer to their technical minimum standards. On the other hand, capacity addition in the renewable energy segment is also expected to remain subdued. Solar capacity addition during 2020-21 is expected to be about 5.5 GW given the execution headwinds.
To conclude, while the liquidity package for the discoms will bring immediate relief to gencos, the revival of the sector in the long term hinges on the implementation of the proposed reforms. These entail measures such as installation of prepaid meters, direct benefit transfer for subsidy, and privatisation of discoms in union territories, among other things.
Priyanka Kwatra