Facilitating economic revival of power sector post COVID-19

The economic slowdown on account of COVID-19 has taken a heavy toll on several industries and sectors, including power. Here we take a look at the ways the power sector can be revived post the global crisis.

The spread of COVID-19 and the subsequent lockdown in India is expected to have a significant impact on the economy, including economic slowdown and disruptions in trade and supply chain. Its adverse impact on economic growth would certainly go beyond Q-1 of FY21. The probability of India entering recession and many Indian companies going into a financially precarious situation has increased manifold. Many economists believe that India’s GDP growth is expected to remain highly uncertain but certainly below 4 percent in FY21. The power sector being part of essential services is trying hard in this difficult time to keep lights on in every home.

Indian Energy Exchange (IEX) shares a few possible ways out for supporting the power sector and industries to overcome the impact caused by the pandemic.

Build up demand for power by providing 24/7 uninterrupted supply: With demand for power having slowed down, the Indian power sector would be in excess availability of power supply and several state and IPP generators are either not operational and/or operating at low PLF. The generation through these plants can easily be stepped up if the state governments and distribution utilities commit to supply power 24/7 to all consumers including residential, healthcare, public utilities, agriculture and other consumer categories.

Provide special credit lines to distribution utilities (DISCOMs): The immediate threat to the power sector today is to maintain liquidity at distribution utilities (DISCOMs). This is more specific to DISCOMs who are already under financial stress and still struggling with high AT&C losses, non-cost reflective tariffs, etc. Industrial, commercial establishments and Indian railway constitute about 40 percent of the all-India electricity demand. With the commercial and industrial (C&I) establishments under lockdown or with limited production or footfall, the residential consumption is increasing as mostly people are working from home. This means that cross-subsidising consumption is reducing, and the subsidised consumption is increasing. This will lead to revenue loss to the utilities as per their annual tariff orders and is likely to increase the ACS-ARR gap in times to come if the situation prevails for a longer duration. ICRA estimates revenue deficit of `130 billion per month on all-India basis.

Weak liquidity position of the distribution utilities may have manifold implications such as inability to provide 24/7 reliable power supply to consumers and essential services, cascading financial stress among generators, coal companies and transmission utilities as well as inability to procure power from market to meet short-term power requirements.

To address this situation, IEX recommends that DISCOMs be provided special Lines of Credit in the fiscal year 2020-21. The government could take steps to ensure that DISCOMs are enabled with working capital credits which would allow them to continue operations. Further, DISCOMs can also leverage the available power on the markets at a low cost, thereby enabling optimisation of power procurement cost and reducing financial stress. The price discovered at IEX platform since the COVID-19 lockdown is at an all-time low, with average price in March 2020 at only about `2.46 per unit with ample power availability as the supply bids at the exchange are far outweighing the demand. Distribution utilities can make use of this opportunity by replacing their high variable cost power and buying electricity from the spot market and supplying 24/7 power to all consumers.

The government must also extend the credit period for payment to generation and transmission companies by DISCOMs or the payment should be based on their collection efficiency until we overcome the present situation and things move to normalcy. The same would also imply relaxing the norms for upfront LC requirement towards generators, particularly in this period of crisis. A similar provision may also be incorporated for generators sourcing coal from Coal India Limited (CIL).

Support industrial revival by waiving off cross-subsidy surcharge (CSS): Heavy industries and energy-intensive industries such as cement, iron, steel, aluminium, chemical, etc. spend 30-40 percent of their production cost on electricity alone. Significant cost savings can be made by industrial consumers by sourcing electricity from competitive sources under open access. This is the need of the hour as with consumption worsening, industries would financially struggle to revive. Several tariff-related barriers such as high cross-subsidy surcharge make open access commercially unviable in many states. It is estimated that complete removal of cross-subsidy surcharge could accrue industry to potentially save up to `80,000 crores annually and if the potential savings of `80,000 crores are reinvested in manufacturing by the industry, it can lead to an increase in the GDP of India to the extent of approximately `2,80,000 crores (approximately 2 percent of GDP). Hence, the government could waive cross-subsidy surcharge for FY21 to accelerate revival of industries.

Refrain SERCs from levying additional surcharge: The State Electricity Regulatory Commissions (SERCs) generally pass on the fixed cost burden of the stranded capacity as additional surcharge to open access consumers. With the COVID-19 impact, as demand for power has slowed down, large generation capacities are expected to get stranded. In response to that, DISCOMs tend to increase additional surcharge; for example, Gujarat has recently increased ASS from 10 paisa/unit to 37 paisa/unit.

However, it is pertinent to note that generation capacity stranded here is not due to open access consumers moving from DISCOMs but due to demand reduction which is a force majeure event. Due to this force majeure, SERCs should not pass on the fixed cost burden of the stranded capacity as additional surcharge to open access consumers.

The state governments can issue necessary directions to the SERC under Section 108 of the Electricity Act 2003 in this regard. Additionally, SERCs can eliminate the need of additional surcharge through better management of surplus power, reallocation to underserved consumers or trading of power. IEX estimates that complete removal of additional surcharge could provide an annual saving potential of `40,000 crores in the economy.

Ensure adequate domestic coal to generators at concessional price: The revenue of generators with long-term PPAs will be ensured with capacity charges if they show plant availability. However, due to drop in demand, revenue of generators without long-term PPAs would be adversely impacted. To support such generators, the government must ensure adequate availability of domestic coal at concessional prices to these generators. Notwithstanding the above, higher coal prices will also lead to increase in the price of electricity. Further, there will also be pressure on imported coal pricing with China’s manufacturing sector reviving post COVID-19. Hence, ensuring adequate availability of domestic coal at concessional prices will be important in reviving the power sector and keeping power prices under check.