Power demand set to fall further, discoms stare at cash crunch

Posted on 20 Apr 2020

With job losses looming large households may lack resources to pay current bills, the road for economic recovery appears to be a far-fetched idea. Private players who over the last several years have created generation capacity in conventional and renewable sectors now face immense challenges.

Leading industry association CII (Confederation of Indian Industries) in its recent report has estimated a net revenue loss of Rs. 30,000 crores for Discoms and liquidity crunch of around Rs.50,000 crores. Discoms, as per government data in February 2020, already owe Rs.92,602 crores to Gencos, which is humongous. CII has come up with many suggestions including easy credit facilities, lower tariff for industrial and commercial consumers, and deferral of indirect taxes such as electricity duty, coal cess, to help Discoms cope with this situation and remerge stronger.

Industry sources have pointed out that there is an almost 30% reduction in demand in this lockdown period and this along with delays in collection of revenues can lead to a shortfall of Rs. 30,000 - Rs.40,000 crores for Discoms, or perhaps even more. Speaking about the recovery post-lockdown, experts suggest that entities need to minimize cash flows, get deferral in payment of indirect taxes such as electricity duty and coal cess, and get an extension in debt-servicing moratorium to six months instead of three as announced by Reserve Bank of India recently. Further, Coal India Limited should grant a 30 - 45 days of credit to thermal plants for procurement. Overhauling tariff structure with lower commercial and industrial tariffs will also lead to quicker recovery in economic activities. India needs to follow the examples set by countries such as Germany, Japan, United Kingdom, Spain, and the United States of America. Tariff levels for industrial consumers which are higher in India as against these countries needs to be brought down significantly. Measures such as these will help the power sector to bounce back.

Power generation and transmission companies will have a tough time as the liquidity of discoms are affected. As per Payment Ratification and Analysis in Power Procurement for bringing Transparency in Invoicing of generators (PRAAPTI), Ministry of Power, Government of India, the outstanding amount at the start of this month was estimated at Rs. 87,244 crores at all-India level. This is likely to get worse with the lockdown extension delaying payments.

A senior power sector official meanwhile said that the lockdown is expected to decrease power demand by around 20 - 25% on a year-on-year basis. Discoms will be affected in the near term with delays in cash collections and an estimated revenue deficit of Rs. 130 billion per month, on a pan-India basis.

Throwing light on the post-lockdown scenario, a power sector analyst said that only partial pick-up in demand can be expected since industrial units will restart their operations with scaled down capacities and then perhaps shift gears to make up for the losses suffered through extra shifts. Explaining further he says that the alarming factor is that power sector even before Covid-19 was a loss-making business and the outbreak of coronavirus simply added on to it.

Market sources have said that short-term power purchases are gaining popularity among various states. Uttar Pradesh, one of India’s largest states, for example, has announced that it won’t be able to pay to power, coal and railways sectors. Maharashtra is also examining cost effective alternatives and many other states are going to do so in the coming months.

Around 40% of India’s power demand comes from industrial and commercial businesses as well as the railways and ever since the lockdown began these aren’t running, resulting in a substantial drop in demand and revenue. Significantly, these sectors account for a large chunk of discoms’ sales revenues. With the government shifting its focus to containing the spread of coronavirus, food and medicines have become priority areas, discoms though important may not get special support.

Prime Minister of India Narendra Modi extended the lockdown to flatten the coronavirus curve and prepare the residents of the country as well as business establishments for a longer gestation. It is indeed challenging times for the power industry and the extension of the lockdown to fight the coronavirus pandemic will further impact power demand, dwindling cash flows and payment delays for power generation and transmission companies as well. We’re in for a long overhaul.

April 14, 2020, was the New Year for many states in India as well as for some South East Asian countries overseas which once formed part of the ancient Chola Empire. Interestingly there wasn’t much celebrations, at least in the public domain, with India being under a 40 days lockdown till May 3, 2020.