Home >Markets >Mark To Market >As power demand trips on thermal circuit, recovery could be slow and damp

For the third consecutive month, thermal power generation recorded a 19% year-on-year decline in October. Although demand typically cools during the slack monsoon season, long-term generation trends are not encouraging either.

Power generation fell 2% during April-October 2019, the first such fall in at least a decade, shows data from the Central Electricity Authority.

Part of the fall can be attributed to adequate rainfall, which apart from reducing temperatures has lowered demand from the agriculture sector and boosted hydropower generation. The 16% rise in hydropower generation in April-October this year was the best in five years.

Still, the fall in thermal power generation is disconcerting. It implies there is a demand deceleration. Despite the rise in the generation of renewable energy, most of India’s electricity needs are met by thermal power.

Utilization levels at the two thermal power plants of JSW Energy Ltd were hit due to reduced offtake by power distribution companies (discoms) last quarter. Similarly, NTPC Ltd’s latest quarterly results show a drop in utilization levels at its thermal power plants, indicating low offtake from buyers. Power generation at NTPC fell 7% last quarter. Even renewable energy firms are seeing a backdown in power offtake by discoms.

An industry expert attributes the fall in demand to the increasing use of energy-efficient appliances. Besides, industry demand has also been contracting and it is a big consumer of power, the expert added, asking not to be named.

The same sentiments are being echoed in the market. “We estimate that energy demand fell 11% YoY in October 2019, the largest across-the-board fall in the last decade. Peak demand also continues to fall. The steep fall is probably the result of a confluence of factors such as a delayed monsoon retreat, implementation of the payment security mechanism, and continued weakness in industry demand," analysts at SBICAP Securities Ltd said in a note.

Besides, volumes and prices in the spot power market are also trending lower. The low demand, if it persists for long, will weigh on the earnings of utility firms.

Firms dependent on spot electricity and short-term power markets will be hit the most. Comparatively, NTPC is better placed due to its regulated business model where its plants have long-term power purchase agreements and are assured minimum return on equity invested.

Additionally, the weakening demand from the industrial sector does not bode well for the overall financial health of the sector. State electricity boards sell power to industrial users at relatively higher tariffs, which compensates for the lower rates in other segments. A prolonged demand slowdown from the industry could impact their cash flows and weigh on power purchases.

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