PolicyImpact of COVID-19 on the Power SectorSaket Surya- April 23, 2020The central government has enforced anation-wide lockdownbetween March 25 and May 3 as part of its measures to contain the spread of COVID-19.  During the lockdown, several restrictions have been placed on the movement of individuals and economic activities have come to a halt barring the activities related to essential goods and services. Therestrictions are being relaxed in less affected areasin a limited manner since April 20.  In this blog, we look at how the lockdown has impacted the demand and supply of electricity and what possible repercussions its prolonged effect may have on the power sector.Power supply saw a decrease of 25% during the lockdown (year-on-year)As electricity cannot be stored in large amount, the power generation and supply for a given day are planned based on the forecast for demand.  The months of January and February in 2020 had seen an increase of 3% and 7% in power supply, respectively as compared to 2019 (year-on-year).  In comparison, the power supply saw a decrease of 3% between March 1 and March 24.  During the lockdown between March 24 and April 19, the total power supply saw a decrease of about 25% (year-on-year).Figure 1: % change in power supply position between March 1 and April 19 (Y-o-Y from 2019 to 2020)Sources: Daily Reports; POSOCO; PRS.If we look at the consumption pattern by consumer category, in 2018-19,41% of total electricity consumptionwas for industrial purposes, followed by 25% for domestic and 18% for agricultural purposes.  As the lockdown has severely reduced the industrial and commercial activities in the country, these segments would have seen a considerable decline in demand for electricity. However, note that the domestic demand may have seen an uptick as people are staying indoors.Figure 2: Power consumption by consumer segment in 2018-19Sources: Central Electricity Authority; PRS.Electricity demand may continue to be subdued over the next few months. At this point, it is unclear that when lockdown restrictions are eased, how soon will economic activities return to pre COVID-19 levels. India’s growth projections also highlight a slowdown in the economy in 2020 which will further impact the demand for electricity.  On April 16, the International Monetary Fund hasslashed its projectionfor India’s GDP growth in 2020 from 5.8% to 1.9%.A nominal increase in energy and peak deficit levelsAs power sector related operations have beenclassified as essential services, the plant operations and availability of fuel (primarily coal) have not been significantly constrained. This can be observed with the energy deficit and peak deficit levels during the lockdown period which have remained at a nominal level.  Energy deficit indicates the shortfall in energy supply against the demand during the day.  Theaverage energy deficitbetween March 25 and April 19 has been 0.42% while the corresponding figure was 0.33% between March 1 and March 24. Similarly, the average peak deficit between March 25 and April 19 has been 0.56% as compared to 0.41% between March 1 and March 24.  Peak deficit indicates the shortfall in supply against demand during highest consumption period in a day.Figure 3: Energy deficit and peak deficit between March 1, 2020 and April 19, 2020 (in %)Sources: Daily Reports; POSOCO; PRS.Coal stock with power plants increasesCoal is the primary source of power generation in the country (~71% in March 2020).  During the lockdown period, the coal stock with coal power plants has seen an increase.  As of April 19, total coal-stock with the power plants in the country (in days) hasrisen to 29 daysas compared to24 days on March 24. This indicates that the supply of coal has not been constrained during the lockdown, at least to the extent of meeting the requirements of power plants.Energy mix changes during the lockdown, power generation from coal impactedDuring the lockdown, power generation has been adjusted to compensate for reduced consumption, Most of this reduction in consumption has been adjusted by reduced coal power generation. As can be seen in Table 1, coal power generation reduced from an average of 2,511 MU between March 1 and March 24 to 1,873 MU between March 25 and April 19 (about 25%).  As a result, the contribution of coal in total power generation reduced from an average of 72.5% to 65.6% between these two periods.Table 1: Energy Mix during March 1-April 19, 2020Sources: Daily Reports; POSOCO; PRS.This shift may be happening due to various reasons including: (i) renewable energy sources (solar, wind, and small hydro) haveMUST RUN status, i.e., the power generated by them has to be given the highest priority by distribution companies, and (ii) running cost of renewable power plants is lower as compared to thermal power plants.This suggests that if growth in electricity demand were to remain weak, the adverse impact on the coal power plants could be more as compared to other power generation sources.  This will also translate into weak demand for coal in the country as almost87% of the domestic coal production is used by the power sector.  Note that the plant load factor (PLF) of the thermal power plants has seen a considerable decline over the years, decreasingfrom 77.5% in 2009-10 to 56.4% in 2019-20. Low PLF implies that coal plants have been lying idle.  Coal power plants require significant fixed costs, and they incur such costs even when the plant is lying idle. The declining capacity utilisation augmented by a weaker demand will undermine the financial viability of these plants further.Figure 4: Power generation from coal between March 1, 2020 and April 19, 2020 (in MU)Sources: Daily Reports; POSOCO; PRS.Finances of the power sector to be severely impactedPower distribution companies (discoms) buy power from generation companies and supply it to consumers.  In India, most of the discoms are state-owned utilities.  One of the key concerns in the Indian power sector has been the poor financial health of its discoms.  The discoms have had high levels of debt and have been running losses. The debt problem was partly addressedunder the UDAY schemeas state governments took over 75% of the debt of state-run discoms (around 2.1 lakh crore in two years 2015-16 and 2016-17).  However,discoms have continued to register lossesowing to underpricing of electricity tariff for some consumer segments, and other forms of technical and commercial losses.  Outstanding dues of discoms towards power generation companieshave also been increasing, indicating financial stress in some discoms. At the end of February 2020, the total outstanding dues of discoms to generation companies stood at Rs 92,602 crore.Due to the lockdown and its further impact in the near term, the financial situation of discoms is likely to be aggravated. This will also impact other entities in the value chain including generation companies and their fuel suppliers. This may lead to reduced availability of working capital for these entities and an increase in the risk of NPAs in the sector.  Note that, as of February 2020, thepower sector has the largest sharein the deployment of domestic bank credit among industries (Rs 5.4 lakh crore, 19.3% of total).Following are some of the factors which have impacted the financial situation during the lockdown:Reduced cross-subsidy:In most states, the electricity tariff for domestic and agriculture consumers is lower than the actual cost of supply. Along with the subsidy by the state governments, this gap in revenue is partly compensated by charging industrial and commercial consumers at a higher rate.  Hence, industrial and commercial segmentscross-subsidisethe power consumption by domestic and agricultural consumers.The lockdown has led to a halt on commercial and industrial activities while people are staying indoors.  This has led to a situation where the demand from the consumer segments who cross-subsidise has decreased while the demand from consumer segments who are cross-subsidised has increased.  Due to this, the gap between revenue realised by discoms and cost of supply will widen, leading to further losses for discoms.  States may choose to bridge this gap by providing a higher subsidy.Moratorium to consumers: To mitigate the financial hardship of citizens due to COVID-19, some states such asRajasthan,Uttar Pradesh, andGoa, among others, have provided consumers with a moratorium for payment of electricity bills. At the same time, the discoms are required to continue supplying electricity. This will mean that the return for the supply made in March and April will be delayed, leading to lesser cash in hand for discoms.Some state governments such asBiharalso announced a reduction in tariff for domestic and agricultural consumers. Although, the reduction in tariff will be compensated to discoms by government subsidy.Constraints with government finances: The revenue collection of states has been severely impacted as economic activities have come to a halt. Further, the state governments are directing their resources for funding relief measures such as food distribution, direct cash transfers, and healthcare. This may adversely affect or delay the subsidy transfer to discoms.The UDAY scheme also requires states toprogressively fund greater share in losses of discomsfrom their budgetary resources (10% in 2018-19, 25% in 2019-20, and 50% in 2020-21).  As losses of discoms may widen due to the above-mentioned factors, the state government’s financial burden is likely to increase.Capacity addition may be adversely impactedAs per theNational Electricity Plan,  India’s total capacity addition target is around 176 GW for 2017-2022.  This comprises of 118 GW from renewable sources, 6.8 GW from hydro sources, and 6.4 GW from coal (apart from 47.8 GW of coal-based power projects already in various stages of production as of January 2018).India has set a goal of installing175 GW of Renewable Power Capacity by 2022as part of its climate change commitments (86 GW has been installed as of January 2020).  In January 2020, theParliamentary Standing Committee on Energy observedthat India could only install 82% and 55% of its annual renewable energy capacity addition targets in 2017-18 and 2018-19. As of January 2020,67% of the targethas been achieved for 2019-20.Due to the impact of COVID-19, the capacity addition targets for various sources is likely to be adversely impacted in the short run as:construction activities were stoppedduring the lockdown and will take some time to return to normal,disruption in the global supply chain may lead to difficulties with the availability of key components leading todelay in execution of projects,for instance, for solar power plants, solar PV modules are mainly imported from China, andreduced revenue for companies due to weak demand will leave companies with less capacity left for capital expenditure.Key reforms likely to be delayedFollowing are some of the important reforms anticipated in 2020-21 which may get delayed due to the developing situation:The real-time market for electricity:The real-time market for electricity was to be operationalised from April 1, 2020. However, the lockdown has led to delay in completion of testing and trial runs. The revised date for implementation isnow June 1, 2020.UDAY 2.0/ADITYA:A new scheme for the financial turnaround of discomswas likely to come this year. The scheme would have provided for the installation of smart meters and incentives for rationalisation of the tariff, among other things. It remains to be seen what this scheme would be like since the situation with government finances is also going to worsen due to anticipated economic slowdown.Auction of coal blocks for commercial mining:The Coal Ministry has been consideringauction of coal mines for commercial miningthis year.100% FDI has been allowedin the coal mining activity for commercial sale of coal to attract foreign players. However, the global economic slowdown may mean that the auctions may not generate enough interest from foreign as well as domestic players.For a detailed analysis of the Indian Power Sector, please seehere.  For details on the number of daily COVID-19 cases in the country and across states, please seehere.  For details on the major COVID-19 related notifications released by the centre and the states, please seehere.ParliamentFirst no-confidence motion of the 17th Lok Sabha discussed todayNiranjana Menon- August 8, 2023Discussion on the first no-confidence motion of the 17thLok Sabha began today.  No-confidence motions and confidence motions are trust votes, used to test or demonstrate the support of Lok Sabha for the government in power.  Article 75(3) of the Constitution states that the government is collectively responsible to Lok Sabha.  This means that the government must always enjoy the support of a majority of the members of Lok Sabha.  Trust votes are used to examine this support.  The government resigns if a majority of members support a no-confidence motion, or reject a confidence motion.So far, 28 no-confidence motions (including the one being discussed today) and 11 confidence motions have beendiscussed.  Over the years, the number of such motions has reduced.  The mid-1960s and mid-1970s saw more no-confidence motions, whereas the 1990s saw more confidence motions.Figure1: Trust votes in ParliamentNote: *Term shorter than 5 years; **6-year term.Source: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.The no-confidence motion being discussed today wasmovedon July 26, 2023.  A motion of no-confidence is moved with the support of at least 50 members.   The Speaker has the discretion to allot time for discussion of the motion.  TheRules of Procedurestate that the motion must be discussed within 10 days of being introduced.  This year, the no-confidence motion wasdiscussed13 calendar days after introduction.  Since the introduction of the no-confidence motion on July 26, 12 Bills have been introduced and 18 Bills have been passed by Lok Sabha.  In the past, on four occasions, the discussion on no-confidence motions began seven days after their introduction.  On these occasions, Bills and other important issues were debated before the discussion on the no-confidence motion began.Figure2: Members rise in support of the motion of no-confidence in Lok SabhaSource: Sansad TV, Lok Sabha, July 26, 2023; PRS.Figure3: Number of days from introduction to discussion on no-confidence motionsNote: Number of days implies calendar days.Source: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.On average, no-confidence motions (excluding the one being discussed today) have been discussed for 13 hours over three days.  Discussions have lasted longer than 20 hours on four instances, most recently in 2003.  Today’s no-confidence motion was allotted 12 hours discussion time by theBusiness Advisory Committee.Following the discussion, the motion is put to vote.  26 out of 27 no-confidence motions (excluding the one being discussed today) have been voted upon and rejected.  This means that no government has ever had to resign following a vote of no-confidence.   On one occasion, in 1979, the discussion on a no-confidence motion against the Morarji Desai government remained inconclusive.  He resigned before the motion was put to vote.  50% of all no-confidence motions (14 out of 28) were discussed between 1965 and 1975.  Of these, 12 were against governments headed by Indira Gandhi.Figure4: Duration of discussion on no-confidence motionsNote: This graph excludes the no confidence motion moved on July 26, 2023.Source: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.In comparison, confidence motions have a more varied history.  The first motion, brought in 1979 to demonstrate confidence in Charan Singh’s government, was not discussed at all.  The Prime Minister resigned before the discussion could take place.  Since then, 11 confidence motions have been discussed in Lok Sabha, with nine occurring in the 1990s.  During this period, several coalition governments were formed, and Prime Ministers sought to prove their majority throughconfidence motions.   These motions have been discussed, on average, for 12 hours over two days.Figure5: Duration of discussion of confidence motionsSource: Statistical Handbook 2021, Ministry of Parliamentary Affairs; PRS.Of the 11 confidence motions discussed in Lok Sabha, seven were accepted.  On three instances, governments had to resign as they could not prove that they had the support of the majority.  On one instance in 1996, the motion was not put to vote.  Following an eleven-hour discussion on this confidence motion, Prime Minister Atal Bihari Vajpayee announced his intention to resign on the floor of the House.  He resigned 16 days into his term.Vajpayee became Prime Minister again in 1999, and faced another confidence motion.   This time, it was put to vote.   The motion was defeated by a margin of one vote.  This has been the closest result on a trust vote in the history of Lok Sabha.  The next closest result was when a motion of no-confidence against P V Narasimha Rao’s government was defeated by 14 votes in 1993.  In most cases, results have been in favour of the government by a large margin.«12345678910»
PolicyImpact of COVID-19 on the Power SectorSaket Surya- April 23, 2020