All of India’s electricity demand from April 2021 to September 2021 grew 12.7% year-on-year (yr) to 707 billion units (BU), supported by a lower base, an improvement in economic activity and lower-than-normal monsoons, which occurred in July and August 2021 led to higher demand from the agricultural segment. Energy demand also remained 2.9% higher in the first half of FY2022 than in the first half of 2020 (pre-COVID), led by a relatively stronger recovery in energy demand, as reflected in an 8.4% growth in the second quarter of FY2022 versus the second quarter of FY2020.
Furthermore, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA commented: “Based on the growth trends in energy demand over the past six months, the outlook for growth in electricity demand for the 2022 financial year is revised up to 8, 0 – 8.5%, supported by a low base effect in FY 2021 and a faster than expected recovery in demand for the second COVID wave in April and May 2021. Nevertheless, the occurrence of a potential third COVID wave and the resulting lockdown restrictions can be monitored . In return, the thermal PLF value for all of India in FY2022 will be slightly improved to around 58.5–59.0% compared to the earlier estimate of 57.0–58.0%. “
Regardless of the recovery in electricity demand, the average thermal PLF level for all of India is expected to remain below 60.0% in the current fiscal year. Therefore, the industry outlook for the thermal power generation segment is negative. This is also due to the lack of transparency when signing new power purchase agreements (PPAs) for thermal IPPs and increasing cost pressure in electricity generation due to rising fuel prices and stricter environmental regulations.
As a result, a sustainable improvement in the growth in electricity demand and in the thermal PLF level (over 60%) remain the critical factors to be monitored from the perspective of thermal generation.
The spot electricity tariffs on the day-ahead market of the Indian energy exchange experienced a significant recovery in 6M-FY2022 to Rs3.7 per unit from around Rs. 2.8 per unit in FY 2021, led by a better-than-expected recovery in electricity demand and of coal supply bottlenecks in August and September 2021.
Given the expected normalization of domestic coal availability, average spot tariffs are likely to stay around Rs 3.5 per unit in the near future. This is still relatively higher than the historical average of Rs3.2 per unit over the last 10 year period. In addition, as seen in the past, the spot tariffs remain inherently volatile, depending on fuel availability, renewable energy generation and the level of demand, ICRA said in the press release.
Mr. Vikram V, Vice President & Sector Head – Corporate Ratings, ICRA, added, “Delays in the rate setting process by state regulators remain a concern as only 19 of 28 utility rate contracts have been awarded in only 19 states for the FY2022 to date and the tariff increases remain modest. No customs orders have been issued in the main states such as Rajasthan, Telangana, Tamil Nadu and West Bengal. With coal as a fuel accounting for about 70% of India’s total power generation, utilities continue to face upward pressure on electricity procurement costs. In the event of an upward revision of the domestic coal price by 10% and an increase in the price of imported coal by about 70% since April 2021, electricity costs for distribution companies across India are expected to increase by about 1.0-1.5%. depending on the supply mix from imported coal-fired power plants. “
“As a result, the timely passing on of fuel and electricity purchase cost fluctuations through the regulatory framework remains extremely critical for state utility companies. ICRA’s outlook for the distribution segment remains negative given the continued financial weakness of most government distribution companies due to operational inefficiencies and inadequate tariffs, ”added Vikram.
Source: IIFL securities