Challenges facing the Indian power sector: Dues rise as demand drops

Discoms had payables of over Rs 1.3 lakh crore in June from 90,000 crore in March

power-discom-reuters Representative image | Reuters

The Indian power sector is facing the impact of the prolonged lockdown, which has led to a fall in demand from high-paying customers such as industrial users and the Indian Railways, even as dues to power generators (gencos) and transmission companies (transcos) have been on the rise.

Though there has been some revival in demand due to the ongoing Unlock process across the country, it has yet to reach pre-COVID-19 levels and may take a few more months until the situation normalises.

The lockdown had earlier hit the liquidity and cash flow position of the Discoms (power distribution companies) and it continued to remain constrained due to the impact of the COVID-19 pandemic affecting industrial revival to normal levels.

In addition, experts feel that the revival of the power sector requires meaningful structural changes targeting an improvement in the operational efficiency, a reduction in cross-subsidies and cost-reflective tariffs.

“Much like many other sectors, the power sector has also been impacted by the economic and supply chain fallout due to COVID-19. The financial health of DISCOMS was fragile even before the pandemic induced lockdowns. Since then, the economics of the industry has been significantly disrupted," observes Dr Arun Singh, Global Chief Economist at Dun and Bradstreet. 

"Power demand has fallen dramatically in the industrial and the commercial sector which pays a higher tariff and thereby cross-subsidises the household and agriculture sector that pay lower tariffs. Higher than expected aggregate technical and commercial losses is exerting additional pressure. Delayed payments or delinquencies from end-users could further strain the balance sheets of DISCOMS. Inevitably, stakeholders across the value chain—power generating companies, fuel suppliers, and etc—are also being impacted”  he adds. 

As per a report by Brickwork Ratings, the power sector's situation has worsened since the lockdown was imposed, with demand falling by more than 30 per cent from high volume and high paying customers such as industrial customers and the Indian railways. While demand has revived to some extent post lockdown, with relaxations being announced in different states, it continues to remain weak. Though it is gradually picking up there is a delay in the pickup of demand from commercial customers as several businesses are yet to start operations and offices are still showing lower occupancy rates.

The report also notes that a reduction in disposable income had led to a delay in the recovery of discretionary spending. 

The Brickwork Ratings report also states that the entire power sector in India is currently in a precarious situation due to a significant increase in the DISCOMS’ payables to Gencos and Transcos.

It observed that payables by Discoms have increased substantially from Rs. 90,000 crore as of March 2020 to more than Rs. 1.30 Lakh Crores as of June 2020. The central government had announced a liquidity infusion package for DISCOMS amounting to Rs 90,000 Crore in May 2020. However, disbursements under the scheme are yet to happen and with increased payables as of June 2020, the amount announced under the package will not be sufficient to meet all dues. 

As per a report by Anand Rathi, after four months of contraction, power generation turned marginally positive (0.1 per cent) in July 2020. Hydropower grew in the low teens and the PLF (Plant Load Factor) for thermal power crossed 50 per cent. The Anand Rathi report points out that as an early sign of growth revival, power generation (utilities) recorded 0.1 per cent growth in July 2020 mainly due to strong growth in hydro-power generation.

At the same time thermal power, too, bounced back from a 29 per cent contraction in April 2020 to a 2 per cent contraction in July 2020. However, nuclear power maintained a downward trajectory.

As per a region-wise comparison when compared to July 2019 the shares of the eastern region and western region in power generation improved, while that of the southern region declined. Also, there was a decline in the share of state utilities compared to that of the central government which had improved. 

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