Sector Analysis. How the Covid-19 lockdown has drained India’s power companies

The Covid-19 lockdown has thrown many industries out of gear. The power sector, which was already under stress, is expected to worsen further.

Power generator companies that have been saddled with unpaid dues (of over ₹80,000 crore at the end of February 2020) from State power distribution companies (discoms), now have to additionally grapple with a sharp fall in demand amid the coronavirus-induced lockdown.

In the last 10 days of March 2020, there has been a 20-30 per cent fall in demand. The current crisis has led to a fall in share prices of even solid names in the space such as NTPC, NHPC and PowerGrid which operate mostly on a regulated business model.

The impact

According to reports, electricity consumption has fallen by around 9 per cent y-o-y in March to 110.2 billion kWh (kilowatt-hour). This is after consumption rose 10 per cent to 104.62 billion kWh in February, data from the National Load Despatch Centre show.

The plunge in demand will lead to a fall in revenue for power generators such as NTPC, JSW Energy, Tata Power, Adani Power, NHPC and CESC. Even transmission companies like Adani Transmission and PowerGrid will get impacted, as many State governments have given a moratorium on payment to end-consumers till June 2020. This means the results of quarter ending June 2020 of power producers and transmission companies will be severely hit, and predictably, cash flows as well.

The expectation for sombre results is reflected in the fall in share prices of even companies such as NTPC, NHPC and PowerGrid that have the majority of their businesses under a regulated tariff structure.

NTPC is trading at 5.7 times its 12-month trailing earnings compared with a three-year average of 11.5 times. NHPC and PowerGrid are trading at 6.5 times and 7.7 times their 12-month trailing earnings, compared with their three-year averages of 11.9 times and 12.3 times, respectively.

Ailing discoms

State discoms usually clear a huge chunk of their pending dues to power generators in March as State governments transfer funds to make the payments. For instance, in March 2018 and March 2019, the amount billed was ₹12,819 crore and ₹15,369 crore, respectively, and the payments made by discoms were ₹21,472 crore (March 2018) and ₹22,278 crore (March 2019).

However, many State discoms have now invoked the force majeure clauses in their contracts to delay payments to power producers. There is no clarity on how this situation will pan out in the near future.

The Power Ministry, through a notification on April 6, has clarified that the obligation to pay for power within 45 days of the presentation of the bill or as provided in the PPA (power purchase agreement) remains unchanged. The only relaxation is with respect to the prepayment or letter of credit for the cost of power.

From July 1, 2019, all discoms have had to furnish a letter of credit worth their entire electricity sourced (100 per cent cost of power). This has been relaxed to 50 per cent until June 30, 2020.

Also, upon the Power Ministry’s advise, the Central Electricity Regulatory Commission (CERC) has reduced the late payment surcharge for discoms, to 1 per cent per month till June 30, 2020, from the 1.5 per cent earlier.

The Centre is also working on a package to provide a special liquidity window for discoms so that they can make payments to power producers and transmission companies.

Impact on key players

According to data from the PRAAPTI (Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal, out of the ₹80,324-crore overdue bills of power generators at the end of February 2020, ₹73,438 crore pertains to power from conventional sources such as thermal, nuclear and hydro power. The rest relate to renewable power producers.

Out of the listed power companies, NTPC, being the largest power producer in India, has the highest overdue amount at the end of February 2020 — ₹14,689 crore. Adani Power has overdue unpaid dues of ₹4,427 crore; NHPC’s overdue amount was ₹2,843 crore.

Companies like NTPC, NHPC and PowerGrid operate the majority of their projects on a regulated business model backed by PPAs. According to the Power Ministry’s notification, the obligation to pay capacity charges as per the PPA as well as transmission charges continues.

Hence, companies such as NTPC should get to recover at least their fixed costs (capacity charges). Transmission charges payable to companies like PowerGrid and Adani Transmission will also have to be paid.

But many State discoms are invoking the force majeure clause in their PPAs to even delay fixed cost payments to power producers. Hence, it’s not certain how this will pan out till June 30, 2020.

With industries being shut during the lockdown, it’s a double whammy for the power industry as a whole. The industrial sector, which makes up nearly 41 per cent of India’s power consumption, subsidises the agricultural and household sectors’ power bills.

Without this cross subsidy, the current lockdown-induced pain for the power sector can persist longer.

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