Power generators in India are going through a rough patch with the combined impact of rising unpaid dues from discoms, and falling demand and consequently utilization levels at the power plants. In today's post, we look at how the discom situation is playing out and the extent of the damage there, the impact across geographic areas, and the drivers for the slowdown and potential recovery.
The issues with discoms
The situation with discoms in India continues to go from bad to worse. The outstanding dues by distribution companies (the amount that they should have paid the power generators but haven't yet) rose by 45% ballooning to 81,085 cr. Public sector power producer NTPC was owed the highest amount of money at more than 12,000cr outstanding. This problem has continued to plague the sector for years now, and continue to go unabated.
What happened to production across India
While the total production in India did drop by 2.1% vs the same period last year, this was considered an improvement given the strong drops of 12.9% and 6.1% in October and November respectively. The plant load factor (percentage of the power plant's capacity that is utilized) fell from 59% to 54%. A reduction in capacity utilization has a strong negative impact on the margins of power generators given the fixed costs involved in running the plant. This fall in demand combined with the ballooning unpaid dues from the distribution companies are likely to put the power producers under tremendous stress in the medium term. The northern and southern regions saw the strongest dips in demand with a 11% drop in the North and a 6% drop in the south, with the west providing slight relief with a 3.5% growth.
What is driving the slowdown, and how can that change
A drop in industrial production, which is one of the major sources of demand for the power plants is the most important driver of the slowdown. While this number did show a modest recovery in November, it is expected to remain low in the short-medium term, ensuring the pressure on the producers continue. While the increased push towards renewables will bring in supply pressures, we believe that conventional power will remain a major portion of the overall capacity and production mix given the sheer scale of India's energy demands. On the external front, the distribution companies show neither the ability nor the intent to reduce their outstanding dues which will ensure that it continues to remain an overhang on the power companies. From where we stand today, the only positive for the space is the opening up of India's coal to a wider variety of players, which would allow private competition to come in, and increase the supply and consequently the prices of one of their key raw materials.
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