Power generation has contracted for the third consecutive month in October due to low industrial growth, an unusually prolonged monsoon and the mandatory opening of letter of credit. After a 3 percent fall in power generation in September, the situation has worsened in October with a 13 percent decline. The contraction is acute in the thermal segment where the generation declined by 20 percent in October as compared to the same period last year.
The trend is worrying because power is one of the most critical components of infrastructure, which is crucial for economic growth. In fact, Vinayak Chatterjee of Feedback Infra asserts that roads, power, railways have a multiplier effect on the economy.
Very recently, chief economic advisor Krishnamurthy Subramanian called electricity and power generation sector a leading indicator of growth across the world. He said the sector grew 8.6 percent, which is a good sign of green shoots towards higher growth.
Consequently, a contraction in power demand signals a weakness in economic activity. This was evident in the Index of Industrial Production data for August wherein a decline of 0.9 percent in the electricity sector contributed to the overall contraction of 1.1 percent.
Plant load factor (PLF) for thermal power plants has slipped below the 50 percent mark for the first time since April 2011. Thermal PLF in October was recorded at 49.18 percent, compared to over 65 percent last year.
While the sector has been plagued by supply-side issues like lower offtake from distribution companies and coal shortage, the recent decline has been attributed to demand-side issues.
Indian Energy Exchange said that all India peak demand at 164 GW in October 2019 represents a fall of 4 percent over demand of 171 GW in October 2018 due to extended monsoons. This is underscored by the average market clearing price which was down by 54 percent from Rs 5.94. per unit in October last year and 2 percent in September 2019.
Analysts argue that while residential demand usually perks up around Diwali, the temporary shutdowns due to holidays leads to lower demand from the manufacturing and commercial sectors.
Anuj Upadhyay, research analyst, power at Emkay said that the generation has declined for 3rd consecutive month with October witnessing the steepest decline in the past one decade. He said the subdued demand can be attributed to the extended monsoon and also due to a slow down in economic activity.
Generation across coal-based plants, which contributes 65 percent of total generation in the country, witnessed the highest ever decline of 19 percent YoY and registered an all time low coal PLF of 49.2 percent.
Upadhyay added that generation across the hydro space continued to impress as the record rainfall in the year has provided for better water availability across the reservoirs.
Power generation nosedived in Haryana with a decline of over 40 percent in October. The contraction is over 30 percent in Karnataka and Punjab. Other industrious states like Uttar Pradesh, Madhya Pradesh, Maharashtra and Rajasthan also saw a decline between 10-25 percent.
While the coal situation has improved over the last few months, 37 non-Pithead plants still have coal stock availability of fewer than 5 days. Additionally, the core issue of burgeoning receivables from discoms continued to weigh on the sector. Despite recent govt initiatives like the opening of letter of credit to guarantee payment to generators, the overdue outstanding amount at September end has inched higher to Rs 64,023 crore, compared to Rs 60,695 crore a month ago.
While industry experts reasoned that the contraction is temporary, a three-month consecutive decline and lowest PLFs in half a decade point to a more systemic problem. Edelweiss recently pruned their FY20/21 sector demand forecast to 3.5 percent/5 percent from 5 percent/6 percent, respectively, as they believe that trend of weak demand would continue in H2FY20 on account of high base and tepid economic activity.