Power demand grew marginally in financial year 2019-20 (FY20) because of the economic downturn that preceded the Covid-19 crisis, but the lockdown added to the slump with annual demand growing only 1.2 per cent. As a result of the lockdown, some private power plants shut completely and others are working at 25 per cent plant load factor.
“The demand slowdown is likely to lead to a contraction of 1 per cent in electricity demand for FY21, considering full lockdown till May 3, partial lifting in non-red zones in May and June and resumption of full operations from July, which is a base case scenario,” an ICRA note, released Wednesday, said.
According to Sabyasachi Majumdar, group head and senior vice-president of Corporate Ratings at ICRA, any extension in lockdown would have further downside risk. “The decline in demand is expected to suppress thermal PLF on an all-India level to about 54 per cent in FY21 against our earlier estimate of 60 per cent and from about 56 per cent in FY20. This would further delay the resolution of stressed thermal assets, a majority of which are impacted by lack of long-term power purchase agreements (PPAs),” he said.
According to Majumdar, both the increase in domestic power demand and commencement of industrial activity will not make up for the fall.
Girishkumar Kadam, sector head and vice-president at ICRA Ratings, said the most impacted will be those that sell through short-term and spot contracts constituting 10-15 per cent of total power sales. Power rates in the day ahead spot market declined to Rs 2.42 a unit (kilowatt per hour) for April from Rs 2.46 in March.
Of the 50 Gw of power sector assets that were already stressed, 44 Gw was tied up in long-term and medium-term contracts. Such contracts provide that states pay fixed charges to generators if plant availability is 85 per cent during the year.
Many states — including Madhya Pradesh, Punjab and Delhi —invoked “force majeure” clauses and wrote letters stating that they would not accept the declared capacity and, therefore, not pay the fixed or capacity charge to generators from whom they were not scheduling power.
“Power is an essential commodity. Drop in demand cannot be a force majeure in this sector and cannot absolve states from paying capacity charge,” Suren Jain, managing director of Jaiprakash Power Ventures, told Business Standard. The company had to shut down its 500 Mw Bina power plant in Madhya Pradesh because of low demand while its Nigrie supercritical plant is running at about 25-26 per cent PLF.
Jain said if force majeure notices were not withdrawn it would hamper the company’s ability to meet operation and maintenance (O&M) and debt costs and would to the stressed sector collapsing.
The fixed component in the tariff meets the debt servicing and O&M costs. Generators securitise this revenue to take loans. The charge is fixed through regulatory approvals.
The ministry of power on April 6 issued a clarification after states invoked force majeure. It had earlier allowed force majeure for power sector and allowed discoms
a moratorium on payments.
A recent Confederation of Indian Industry study had estimated that demand reduction coupled with delays in collections could cause a cash shortfall of Rs 30,000-40,000 crore for discoms.
“We have witnessed a 25-28 per cent reduction in demand, compared to pre-lockdown levels, according to POSOCO data. This can result in an even higher impact on discom revenues, since the demand contraction is largely from industrial and commercial customers who pay higher tariffs. In case of an extended period of lockdown or more gradual recovery of demand, this gap could grow even larger,” said the study.
This liquidity shortfall would likely worsen the payment position in the sector, where discoms
already owed generators Rs 90,000 crore before the lockdown.
Kadam said timely and adequate liquidity support from state governments, including payment of regular agriculture subsidy, remains crucial.
While the lockdown heightens counter-party credit risks for ICRA-rated portfolio in the power sector, the credit profile of ICRA-rated power generation
entities in the investment grade is supported by the availability of liquidity buffer in the form of debt service reserve and undrawn working capital limits. The agency would continue to monitor the impact on the receivable position from counterparties for its rated portfolio.
The impact is more prominent on the performance of state distribution utilities, and, therefore, the outlook on the long-term rating for two state distribution utilities has been revised.
This apart, under-construction renewable power projects are likely to face delays. In this context, the Ministry of New and Renewable Energy (MNRE) has notified an extension of lockdown period plus 30 days for all renewable energy projects, under the force majeure clause.
Given that the lockdown would impact project implementation in Q1FY21 and assuming normalcy thereafter, capacity addition in the wind and solar segments together is likely to be lower by about 25 per cent to 8 Gw against earlier estimates of 11 Gw for FY21.