Energy demand growth outlook for FY2022 revised upwards; to grow by 8.0 – 8.5%: ICRA

The all-India electricity demand during the period from April 2021 to September 2021 has increased by 12.7% to 707 billion units (BU) on a year-on-year (Y-o-Y) basis supported by a lower base, improvement in economic activity and lower than normal monsoons leading to higher demand from the agriculture segment during July and August 2021. The energy demand in H1 FY2022 also remained higher by 2.9% against the same in H1 FY2020 (pre-COVID), led by a relatively sharper recovery in the energy demand as reflected from 8.4% growth in Q2 FY2022 against Q2 FY2020.

Commenting further, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head – Corporate ratings, ICRA, said, “Based on the energy demand growth trends seen during last six-month period, the electricity demand growth outlook for FY2022 is revised upwards to 8.0 – 8.5%, supported by low base effect in FY2021 and faster than expected recovery in demand post COVID second wave seen in April and May 2021. Nonetheless, any emergence of potential third COVID wave and consequent lockdown restrictions remains a monitorable. In turn, the all-India thermal PLF level is estimated to show a modest improvement to about 58.5-59.0% in FY2022, against the earlier estimate of 57.0-58.0%.”

Notwithstanding the recovery in electricity demand, the all India average thermal PLF level is likely to remain subdued, at below 60.0% in the current fiscal. Thus, the sector outlook on the thermal power generation segment is Negative. This is also because of the lack of visibility in signing of new power purchase agreements (PPAs) for thermal IPPs and an upward pressure on cost of power generation with the strengthening in fuel price levels and tighter environmental compliance requirements.

As a result, a sustained improvement in electricity demand growth as well as thermal PLF level (above 60%) remain the critical factors to monitor, from the outlook perspective on thermal generation.

The spot power tariffs on day ahead market of the Indian Energy Exchange witnessed a sharp recovery to Rs3.7 per unit in 6M FY2022 from about Rs. 2.8 per unit in FY2021 led by better than expected recovery in electricity demand and coal supply constraints witnessed in August and September 2021.

With expected normalisation in domestic coal availability, the average spot tariffs are likely to remain at about Rs3.5 per unit in the near term. This is still relatively higher than historical average level of Rs3.2 per unit over the last 10-year period. Further, spot tariffs remain inherently volatile as seen in the past, depending on the fuel availability, the renewable energy generation and demand level, ICRA said in the note.

Mr. Vikram V, Vice President & Sector Head – Corporate Ratings, ICRA, adds, “Delays in tariff determination process by state regulators continues to remain an area of concern given that tariff orders have been issued for utilities in only 19 out of the 28 states for FY2022 so far and the tariff hikes remain modest. Tariff orders have not been issued in the key states such as Rajasthan, Telangana, Tamil Nadu and West Bengal. Given that coal as a fuel contributes about 70% of all India energy generation, distribution utilities remain exposed to an upward pressure on cost of power purchase. In case of upward revision in domestic coal price by 10% and strengthening in imported coal price seen by about 70% since April 2021, the cost of power supply is estimated to increase by about 1.0-1.5% for distribution utilities at all India level, depending upon the mix of supply from imported coal-based plants.”

“As a result, timely pass-through of fuel and power purchase cost variation through the regulatory framework remains extremely critical for the state utilities. ICRA’s outlook for the distribution segment remains Negative given the continued weakness in financial position of most state distribution utilities amid the operating inefficiencies and inadequate tariffs,” Vikram added.
Source: IIFL Securities