COVID-19 and the Indian power sector: Effects and Revival

power sector

The all-encompassing lockdown announced on 24th March 2020 by the Prime Minister as a precautionary measure against COVID-19, followed by subsequent extensions, has resulted in a standstill of all economic activity in the country. The recently released Index of Industrial Production (IIP) shows that economic output during April’ 20 contracted by over 55 per cent year-on-year. This contraction is reflected across all sectors including manufacturing, mining, and electricity generation. While this is a cause for concern, we should try not to restrict our analysis to the numbers alone. As the government advisory itself states, “the indices should not be compared to previous months”, as it is not a true reflection of the state of the economy. If anything, these numbers report the efficacy of the lockdown. It is expected that with the re-opening of the economy, especially of the manufacturing sector, jobs and demand can be revitalized. This will, however, depend on various factors including proper implementation of the government’s ‘Aatma Nirbhar Bharat Abhiyan’ stimulus package and strengthening of the nation’s long-term growth prospects via measures for increasing consumer confidence and attracting investments. 

This piece looks at the effect of the lockdown on the power sector, which itself contracted by 22.5 per cent in April’20. It examines the reasons for the contraction, its effect on various constituent parts of the value chain, and prospects for revival. 

As a starting point, it was expected that electricity demand and generation would be affected by the lockdown due to the restrictions on commercial, industrial and transport (railways account for approximately 500 million units demand per day) activity in the country. Further, the demand profile itself naturally shifted towards domestic usage (24.8 per cent in 2018-19) from commercial (8.2 per cent in 2018-19) and industrial (41.2 per cent in 2018-19) consumption due to people being consigned to their homes. An unnatural spell of cool weather till the end of April, also ensured that power demand remained below normal. 

Public utilities including power generation, transmission and distribution services were classified as essential services during the lockdown, ensuring uninterrupted operations. But subdued demand and the government’s clarification that renewable energy projects’ status of “must-run” remained unchanged (meaning that power produced from renewable sources needs to be prioritized for use over other sources), resulted in an alteration of the usual energy mix. From approximately 72.5 per cent of the energy mix in a month period before the lockdown, coal/ thermal power plants’ share fell to below 66 per cent. The shortfall was met by an increase in the share of all other sources including hydro from 8.7 per cent to 11.6 per cent, renewables from 9.4 per cent to 10.9 per cent, nuclear from 3.3 per cent to 4 per cent, and gas from 3.8 per cent of the mix to 5.1 per cent. In absolute terms, this resulted in a 25 per cent decrease in thermal power production in a month-on-month comparison on both sides of the lockdown announcement. Renewables which includes solar, wind, small hydro and biogas saw a decrease (approximately 4 per cent) in overall generation as well but included a marginal increase in solar production. 

The already strained health of electric utilities especially distribution companies (discoms) has been adversely affected due to multiple reasons. While primarily due to a shortfall of revenue collection from higher tariff C&I consumers (which cross-subsidizes lower tariff domestic and agricultural consumers), there are other reasons including higher aggregates, technical and commercial losses (lower efficiency of power system supplying to domestic consumers as opposed to C&I consumers) coupled with an increase in subsidized consumers paying lower tariffs. Moreover, the outdated mode of manual metering and billing, and domestic credit crunch has exacerbated the problem of revenue collection even from residential consumers. To help ease the financial stress, the Ministry of Power has announced a liquidity support package of INR 90,000 crore for discoms and reduced late payment penalties for payments to generating companies and transmission licensees. However, the lack of liquidity is bound to affect capacity additions plans in the sector overall. 

With the lockdown being eased gradually all over the country, already there is an uptick in power demand, largely on the back of increasing industrial activity. Even residential demand is expected to grow due to hot weather. In fact, the peak demand observed on 25th May was greater than the peak demand on the same day in 2019. However, the commercial sector which includes offices, shopping malls, could still have subdued demand for some time due to the ongoing crisis keeping people at home with continued remote work and online education. But there is a clear indication that the power sector will bounce back to pre-COVID-19 levels, if not the levels achieved last year.

Tracking electricity demand over the next few months will give a clear indication of the level of revival of the Indian economy and whether government interventions are having the desired effects. 

As a side note, it is important that the government and other stakeholders use the learnings from the crisis to overhaul the sector. There is an increasing need to consider policy changes, business modifications and technological innovations to make the sector more cost and resource efficient. The problem of discom debt, already addressed under the UDAY scheme, needs to be re-visited. The cross-subsidy challenge and new tariff and market mechanisms need urgent attention. Moreover, application of innovation across the value chain from digitization of grid operations, smart grids, energy efficiency interventions, and adoption of advanced metering needs to be accelerated. This crisis also gives an opportunity to advance the adoption of renewable energy and energy storage, keeping in mind the lower cost of operations of renewable power plants, the steadily decreasing capacity utilization factor of coal power plants in the country (projected to be 56.5 per cent in 2020-21 not considering any residual effects of the pandemic), and India’s commitments to global climate change goals.   
 

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