Era of uncertainty powered by Covid-19

• The pan-Indian lockdown to contain coronavirus is seriously impacting power demand, which is a barometer of India’s economic activity.
• Energy consumption  has fallen between 18.5% and 24.9% from 25 March to 5 April for India as compared to the consumption in December 2019.
• Taking the challenges faced by the sector into account, the government has taken remedial steps  such as a moratorium on Discoms to make payment to generation companies and transmission licensees.
• Recovery is contingent on return and availability of migrant labour. However, efforts like facilitating digital revenue collection and providing a stimulus package can expedite the sector’s recuperation.

The novel coronavirus has been quite instrumental in blowing the winds of change across the country. From changes in consumption pattern to adoption of a new way of work – the virus has transformed all most all aspects of our daily lives. As social distancing becomes the key to avert the pandemic’s proliferation across the country, the government chose to save lives over livelihoods and ordered a pan-Indian lockdown. Thus, deserted offices and factories have become the new normal amidst these changing realities, with a majority of companies  asking their employees to work from home or working in shifts at reduced capacity where possible. This has had a serious impact on the country’s power demand, which is a key barometer of economic activity.

Electricity is an essential service in today’s time since it is needed not only for the essential sectors like health care and food prodiucts, but for locked out professionals to manage their  for work from home. The Ministry of Power issued various directions in this regard recognising the need of continuous generation of power. In its order dated March 27, 2020, the Ministry directed that where 50% payment security is established by Discoms, generating companies will continue to supply power till June 30. It also directed the Central Electricity Regulatory Commission to provide a moratorium of three months to Discoms to make payments to generating companies and transmission licensees and not to levy penal rates of late payment surcharge.

While the government is doing its best to keep the sector’s engine running, the country is seeing a significant drop in its power consumption. Recent findings by the Energy Policy Institute at the University of Chicago shows a striking decline in the consumption of electricity in the case of India, when compared to the US & the European Union (EU). Researchers compared current energy consumption in these regions with levels in December 2019, and found that this has fallen by between 18.5% and 24.9% from 25 March to 5 April for India. By contrast, for the EU, the drop was merely between 4% and 9.5%, while in the US, energy consumption fell 2.5-6.9%. Meanwhile, data from the power ministry showed that on April 2, the demand fell by around 43 GW, compared to the same day a year ago. It was also observed that this was due to lower requirements from industry and state power distribution companies (discoms) across the country due to the lockdown.

Source: POSCO

The most immediate ripple effect of this development in the short term will be the financial mayhem surrounding power generating and distributing companies. Various discoms started issuing notices to the generating companies inter alia invoking force majeure or unilaterally waiving Late Payment Surcharges. This will seriously impact the power generating companies, who have to mostly purchase the raw materials in advance. This may seriously diminish the ability of these power producers to generate electricity in the future, since they may become cash starved to undertake production and hence affect the power supply chain. Discoms are no better either. It is estimated that discoms are likely to suffer a net revenue loss of around Rs 30,000 crore and liquidity crunch of about Rs 50,000 crore.

Further, the nearly three-month lockdown in China may lead to a shortage of solar PV modules and capital equipment and likely spurt in prices. Moreover, the states with the highest coronavirus infection rates also correspond with the areas that are favourable to the wind and solar development. The halt of manufacturing could also affect spares/components for essential repairs and maintenance in a scenario of prolonged lockdown and shortage of inventory. Also, in the short-term, a paucity of working capital is also plausible due to a delay in collections including subsidy and government dues. Currently, the union and state governments are disbursing ample amount of funds in managing the contagion and in sponsoring the Research & Development directed towards finding a cure for this deleterious disease. In this kind of a situation, revenue from state departments is also likely to get impacted.

In the long-term, the Covid-19 crisis is likely to eclipse the future expansions and investments in the sector due to stress in capital markets, reduced risk appetite and demand uncertainty. Supply chain disruptiona are likely to impact about 62 GW thermal projects which are presently under construction. Industry is concerned for the completion of solar projects scheduled in the next two quarters. A prolonged lockdown might also cause a delay in meeting renewable energy (RE) targets.

Taking these challenges into account, the government is taking some key steps. For example, the Ministry for New and Renewable Energy (MNRE) has coaxed states to incentivize setting up of designated renewable energy manufacturing hubs in India, at a time when renewable energy manufacturers are planning to move out of China. Further, since the power sector’s recovery is contingent on return and availability of migrant labour, the government is mulling ways to re-start highway construction & infrastructure projects where migrant labourers can be gainfully employed.

However, stimulus packages/financialsupport for utilities to continue services to customers would expedite the sector’s revival. It is also important to sensitize customers about digital revenue collection. Strategies must also be devised to infuse capital in utilities to improve the liquidity. Lastly, to ease the burden on the sector, coal prices can be reduced by linking them to recovery of the operation costs and by deferring capital expenses such as depreciation (loan repayment), interest payments and Return on Equity (RoE).