COVID 19 lockdown to adversely impact electricity demand, cash flows for discoms and lead to payment delays for power generation & transmission companies, ICRA

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• Execution of under-construction projects to be adversely impacted
• Also, negative for domestic solar module OEMs / EPC players, given the disruption in supply chain
and an increased execution risk for the orders.

The lockdown announced by the Government of India (GOI) to control the COVID-19 pandemic has resulted in a shutdown of the industrial and commercial establishments (barring a few exempt units) and stoppage of passenger railway services. This has adversely impacted the all India electricity demand, given that these segments constitute about 40% of the all India electricity demand. Further, these segments account for an
even greater percentage of the discoms sales revenues given that they are the subsidising segments. This apart, with the focus of state governments being on healthcare and relief measures, likelihood of subsidy support to the discoms getting deferred cannot be ruled out.

“The lockdown imposed by the Government is likely to adversely impact the all India
electricity demand, with demand expected to decline by about 20-25% on a year-on-year basis during the period of lockdown. This would in turn adversely impact the revenues and cash collections for distribution utilities in the near term, especially given the consumption decline from the high tariff paying industrial and commercial consumers and likely delays in cash collections from other consumer segments. The revenue deficit for the discoms is estimated to be about Rs. 130 billion per month, on all India basis. This would in turn adversely impact the liquidity profile of the discoms, increase their subsidy requirement and lead to delays in payments to the power generation and transmission companies.”, Mr. Sabyasachi Majumdar, Group Head & Senior Vice President – Corporate
ratings, ICRA, commented.

The Ministry of Power, GoI has now issued directors to the central electricity regulator commission to provide a moratorium of three months to discoms on payments to power generation and transmission companies and requested state governments to issue similar directions to state electricity regulators. The power generation companies are already suffering delays in payments by discoms across majority of states, with payment due of more than Rs. 850 billion as of November 2019 at all India level as per the data on PRAAPTI portal. With COVID-19 lockdown accentuating the delays in payments, the availability of adequate liquidity buffer in the form of debt service reserve and undrawn working capital limits, remains important from a credit perspective. Nonetheless, the relief measures such as moratorium on debt servicing over a 3-month period as notified by RBI and expected moderation in the interest rate cycle would be a source of comfort in the near term. However, the timely approval of the moratorium by the boards of the banks and financial institutions remains crucial. The revenues for power generation companies having long-term power purchase agreements (PPAs) with the state distribution utilities (discoms) will be protected by the provision for capacity charges linked to plant availability in case of thermal and large hydro power projects and “must run” status in case of nuclear and renewable power projects. Similarly, the revenue for the power transmission companies is supported by the presence of availability linked payment mechanism. Nonetheless, the operations for power generation projects could be affected because of disruption in movement of manpower, fuel, water and other materials. “While the GoI has now notified electricity including generation, transmission and distribution along with coal transportation as an essential service and has exempted these activities from the lockdown, the effective implementation of this exemption at the state level remains important. Further, average monthly thermal PLF would further dip to 50-52% against 63% in the corresponding period of previous year, due to a considerable
drop in demand and consequently, power generation companies especially those without any long-term PPAs would be adversely impacted given the weakening of the power tariffs in the short-term / power exchange market, says Mr. Girishkumar Kadam, Sector Head & Vice President, ICRA Ratings.

This apart, the under-construction renewable power projects as well as EPC / OEM companies in solar segment are likely to face execution delays because of disruption in supply chain in India and labour availability, following the lockdown announced by the Government of India. This apart, given the import dependency on China for sourcing of PV modules, the execution timelines for the ongoing solar projects is likely to be affected
with delays in the delivery of PV modules following the outbreak of COVID 19 in China. This delay in turn would increase the pre-operative expenses and the overall project cost, which in turn would have impact on the expected returns. In this context, the MNRE has notified that time extension can be provided for all renewable energy projects, which are impacted by the supply chain disruption due to COVID outbreak, under the force majeure clause. “Given the execution headwinds amid COVID 19 affecting Q1 of FY2020-21 and assuming the normalcy thereafter, the capacity addition in the wind and solar segments together is likely to degrow by about 25%, thus estimated at about 8 GW against earlier estimates of 11 GW in FY2020-21.” says Mr. Kadam.

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