India became a third worst-hit country for the COVID-19 pandemic, and the utility sector is witnessing the fallout. Typically, even when economic activity plunges to record lows in times of recession, utilities generate stable revenue. But since COVID-19 has led to the shuttering of all non-essential businesses and put both national and international bans on travel, its impact on utility companies has been significant.
Declining demand for utilities
Until coronavirus plunged the nation into its worst health crisis in decades, India’s power market was among the fastest-growing in the world. But as the lockdown began, India’s electricity use plummeted to levels that were last seen in 2015.
Decreased industrial activity in mineral-rich states like Odisha and Jharkhand and auto manufacturing states such as Maharashtra and Tamil Nadu has become a major contributor to the fall in demand. And with Indian Railways – the single largest consumer of electricity in the country – discontinuing passenger services, the slump for the power sector has only increased.
At the same time, according to recent calculations by credit rating agency ICRA, power distribution companies (DISCOMs) are slated to suffer a loss onward of ₹20,000-crore due to the COVID-19 lockdown. This is because the tariffs for domestic consumption are much lower than those for commercial use, while the purchasing rates for DISCOMs remain significant in both cases.
The ripple effect of the reduced power demand and worsening financial health of DISCOMs is likely to reach renewable energy companies. Since DISCOMs are required to make prompt payments to renewable energy generators, a deteriorating liquidity profile could quickly translate into companies deciding not to purchase power from wind and solar producers.
Meanwhile, the oil demand and two of its major byproducts, compressed natural gas (CNG) and piped natural gas (PNG), has also nosedived due to an extraordinary decline in air, shipping, and vehicular traffic coupled with shuttering of businesses.
With the sales volumes of oil and gas utilities taking a hit, Indian refiners are processing less and less crude oil into fuels like liquefied petroleum gas (LPG). However, unlike other gas products, the demand for LPG is swimming against the tide.
In an attempt to ease coronavirus-induced unemployment burden, the Indian government has pledged to provide cooking gas free-of-cost to more than 80 million poor households for three months. Moreover, as families are locked together 24×7, they are cooking more and eating more, leading to an unexpected surge in domestic consumption of LPG.
The country’s largest refiner, Indian Oil Corp, has cut throughput at most of its refineries by up to 30 percent in a quest to optimize operations. Therefore, India now needs to increase its LPG imports by as much as 700,000 tonnes a month.
Before you argue that increased domestic demand for power and gas is a silver lining for the utility sector, let’s get you to the catch…
Operational constraints and worker safety
Both center and state governments have imposed restrictions on the movement of people during the COVID-19. The police have completely sealed several disease hotspots. This means that it has become extremely difficult for utility providers to take manual meter readings and generate accurate, consumption-based bills.
Besides, customer interactions can increase health risks for utility workers and ensure employee safety is paramount for both utility generators and distributors. As such, cash collection and revenue generation by utilities has been and will continue to be adversely impacted – at least in the near-term.
In the medium-term, global supply chain disruptions are likely to continue, and companies may have to struggle with securing a reliable stream of spare parts. This, in turn, will affect their ability to keep pre-emptive maintenance costs down.
Right now, a decrease in demand is allowing many power generators to defer maintenance, which would otherwise have been prioritized. As a consequence, the companies that earn their revenue through maintenance of power plant generation equipment are getting hurt.
Another operational area that is being particularly impacted by COVID-19 is capacity building and network expansion – especially for projects that rely heavily on imports of critical equipment and material. These delays will make cost overruns inevitable for utilities, forcing companies to seek support from already-stressed banks.
And it doesn’t help that many migrant workers and contract laborers have returned to their hometowns to ride out the COVID-19 lockdown. They aren’t likely to rush to non-native cities soon. A resulting, worrisome shortage in the workforce will lead to a new wave of operational challenges in the field, control rooms, substations, and other facilities across utilities.
In a fast-moving, an unparalleled emergency like coronavirus, a safe and reliable supply of utilities like electricity and gas is essential to encourage people to stay home and stop the spread of disease. As they provide continued support to governments and public healthcare facilities, utility workers are no less than frontline warriors.
Hence, utility providers need to guarantee the safety and well-being of their employees, but they must also device contingency plans for any operational disruptions, including sourcing options, both near and medium-term.
As COVID-19 challenges all previously-tested continuity plans for utilities, business leaders may want to increase automation and technology in routine functions and get the work done with minimal person-to-person contact.