Economic Travails Depress Overall Power Demand and Prices in India

The slowdown in the Indian economy is no longer news as it has affected a broad swathe of the economy with hardly any sector being unaffected from the economic woes. While the GDP growth in the 2^nd quarter of 2019 had fallen to a record low of 5%, the 3^rd quarter promise to be even worse with industries showing a decline and consumption of automobiles, real estate and even daily essentials showing a sharp fall. Even the power sector has started to be severely affected by this economic malaise.

While power demand declined in the low single-digit range in August and September, it declined by more than 12% in October. The Indian government had explained the decline in the earlier months due to the extended rainy season and low coal power stocks, the massive decline in October cannot be explained by these reasons. The power prices in the spot exchange have also collapsed to a two-year low to below INR 3/kwh. This shows that rather than a supply shortage issue it is a demand related problem. There is enough power in the country but not enough buying interest from utilities. While nobody can explain the entire problem, one factor could be due to lower factory utilization which is leading to lower demand from industries. The automobile industry has been seeing demand go down by double digits, this will obviously result in lower demand for power as well as other variable raw materials that are used.

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This is also troubling for the renewable power sector in the country as states are starting to curtail generation from both solar and wind power plants. RE plants are expected to run continuously as they don’t require fuel. This leads to large losses for RE developers. The must run regulation for RE plants remains mostly in name as distribution utilities stop RE plants on any whim. The lower demand is also a big issue for the thermal power plants in the country which were already running at low PLFs even before this huge demand slump. There is also the problem of future capacity additions. With the country having a large surplus capacity, how will the target of  175 GW by 2022 be achieved and is there any rationale behind going for this target when the existing power plants are not being fully utilized?