Lockdown to Impact Power Demand, Cash Flows for Discoms: ICRA

The COVID-19 lockdown will adversely impact power demand, cash flows for Discoms leading to payment delays for Gencos and transmission firms, as per ICRA

The lockdown announced by the government to control the spread of the Novel Coronavirus (COVID-19) pandemic will adversely impact electricity power demand, and cash flows for distribution companies (Discoms) – leading to payment delays for power generation and transmission companies, ratings and research agency ICRA has revealed.

The lockdown has resulted in a shutdown of the industrial and commercial establishments and the stoppage of passenger railway services. This has adversely impacted the all India electricity demand, given that these segments constitute about 40 percent of the all India electricity demand, a statement issued by ICRA said. 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, the likelihood of subsidy support to the Discoms getting deferred cannot be ruled out, it added.

ICRA Ratings group head and senior vice president – corporate ratings Sabyasachi Majumdar said, “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 percent on a year-on-year basis during the period of lockdown.

“This would in turn adversely impact the revenues and cash collections for Discoms 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 an 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.”

The power ministry on March 27, 2020, issued directions to the Central Electricity Regulatory 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 (Gencos) are already suffering delays in payments by discoms across a majority of states, with payment due of more than Rs 88311 crore as of January 2020 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, the analysis added.

However, it said that relief measures such as a moratorium on debt servicing over a 3-month period as notified by Reserve Bank of India and expected moderation in the interest rate cycle would be a source of comfort in the near term. The timely approval of the moratorium by the boards of the banks and financial institutions remains crucial.

The revenues for Gencos having long-term power purchase agreements (PPAs) with the state Discoms will be protected by the provision for capacity charges linked to plant availability in case of thermal and large hydropower projects and “must-run” status in case of nuclear and renewable power projects.

The under-construction renewable power projects, as well as EPC and manufacturing companies in the solar segment, are likely to face execution delays because of disruption in the supply chain in India and labour availability, following the lockdown. Given the import dependency on China for sourcing PV modules, the execution timelines for the ongoing solar projects are likely to be affected by 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 an 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 the 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 de-grow by about 25 percent, thus estimated at about 8 GW against earlier estimates of 11 GW in FY 2020-21,” said ICRA rating sector head & vice president Girish Kumar Kadam.