Déjà vu for thermal power sector as the lockdown hits demand again
- Producers who do not have enough PPAs will face a difficult choice of plant shutdowns or operating losses
- Peak electricity demand plunged 32% from 171,000 megawatts (MW) on 1 March to 117,000MW on 29 March
Electricity generation had recovered in January and February this year, after four months of declines in 2019. But it is set to plunge again as industries and commercial establishments across the country have either shut shop or have curtailed activity significantly owing to the country-wide lockdown.
Peak electricity demand plunged 32% from 171,000 megawatts (MW) on 1 March to 117,000MW on 29 March. The reported numbers are at least a fourth lower than the year-ago peak demand levels and reflect the extent of demand erosion in the country.
“Although fall in industrial/commercial demand due to the lockdown has been a major factor, the expected increment in retail demand has been much lower,” said analysts at ICICI Securities Ltd in a note.
The impact will be felt by all stakeholders, more so by thermal power producers. The fall in demand will worsen the utilization levels of coal-fired power plants. Utilization stood at record low levels of 56% in the 11-month period between April 2019 and February this year.
Producers who do not have enough power purchase agreements (PPAs) will face a difficult choice of plant shutdowns or operating losses due to underutilization. Prices in the spot electricity markets on an average are down one-fifth this month.
“Our calculations show that dark spreads have turned negative, and this might prompt merchant capacities to shut or operate at extremely low PLFs. The hit on their near-term earnings is a given until economic activity revives. This is a key monitorable,” said analysts at Edelweiss Securities Ltd in a note. Dark spread is the difference between cost of coal needed to produce electricity and realization in the market. PLF is plant load factor.
Adani Power Ltd, JSW Energy Ltd, Jindal Steel and Power Ltd and several other companies in private sector have power plants that do not have enough PPAs and are dependent on spot electricity markets. Shares of Adani Power and JSW Energy are down 34-58% from their highs earlier in the year.
Low economic activity can impact volumes on the Indian Energy Exchange, whose shares are down about 34% from its highs in January.
The impact will be felt by Coal India Ltd as well, the biggest supplier of fuel to the power sector. Faced with low demand, companies will curtail coal offtake. This can weigh on Coal India’s sales.
The regulated nature of business will cushion NTPC Ltd. But payments will be delayed, stretching the working capital situation. Overall, while the impact will vary across the value chain, there is no escape from the virus damage for anyone.
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