Effect of COVID-19 on Energy Sector

Currently, the world is witnessing a pandemic situation due to COVID-19 which is impacting various dimensions of the world economy drastically. Lockdown in most of the countries has adversely affected the daily life of people in businesses, financial markets, education sector, etc. But what impact shall it possibly have on the Energy Sector? Well, one shall say that it is obvious the demand must have dropped owing to shutdown of various industries and commercial centres such as shopping malls, business parks, theatres etc. Due to lower demand, various plants may be functioning below their earlier Plant Load Factor (PLF). This might be a rising concern of profitable operations of power generators in current situations.

Another factor of concern is the disruptions caused in the supply chain owing to the lockdown. In India, the Ministry of New and Renewable Energy (MNRE) declared the situation as a Force Majeure event, asking state authorities and green energy agencies to provide time extension to developers in the contract for commissioning new projects. In another case, the state DISCOMs curtailed the payments to Renewable Energy (RE) generators stating it a ‘Force Majeure’ situation, however Government later declared not to stop payment for RE generators as they have been granted ‘must-run’ status which remains unchanged during this lockdown.

A PwC report in case of solar industry states “The outbreak of COVID-19 in the Hubei province of China is having a crucial effect on solar projects all over the world given that approximately 63 percent of all solar modules required by these projects, as well as associated hardware such as inverters and trackers, are supplied by China.” We were just witnessing the shift of the entire power sector gradually progressing towards renewables but now there are chances investors could find it difficult to raise equity due to collapse in stock markets, PPA agreements, financing and commissioning of new projects. 

Global oil demand is down by roughly 20 Thousand Barrels Per Day (MBPD) to about 80 MBPD in 2020. As per IEA, there was “significant decline” in global oil demand in Q1 2020 and an “even bigger” decline in Q2 2020 as 3 billion people are unable to travel anywhere for months. The collapse in oil demand and an expected supply surge following the breakdown of the Saudi-Russian-led production pact means up to 15 MBPD of oil will be pushed into storage during the second quarter. For the oil market, it’s a mirror of what happened in China earlier this year as at the height of the coronavirus outbreak in China in February, the country’s oil demand decreased at least 20%, or about 3 million barrels a day. The U.S., Germany, France, Italy, Spain, the U.K., Canada  and India consume 40 million barrels a day, implying that a similar percentage drop in consumption to the one that China suffered would cut demand by about eight million barrels a day. As a result, the price of oil continued to fall. On 29th March, the price slid below $26 a barrel to an 18-year low, about 70 per cent less than at the start of the year.

On the positive side, some analysts are forecasting a recovery as early as the third quarter of 2020. A variety of circumstances, such as government stimulus, consumer confidence, and the number of COVID-19 cases, will play into this timeline.

Although in case of most of Thermal Power Stations (TPS), the prices of raw materials won’t be impacted too much in the long run but the availability of raw materials in the Renewable Energy Sector, especially the Solar PV module generation segment could see a potentially big hit. 

Moreover, as the Residential demand might be on the rise it won’t be able to match up with the industrial and the commercial segment’s demand, if the lockdown sustains for a long term. This could further result in increase in the production cost on account of lower PLF’s leading to lower operational efficiency and higher costs. Also, as there has been a dramatic shift in the consumption patterns of power due to the lockdown, the peak power and energy demand becomes more unpredictable which can be also attributed to the fact that such a situation has never arisen earlier in the Energy Sector’s History. This can have implications of potential outages and blackouts of the grid. Another important aspect of this is the financial implications of the Independent Power Producers (IPP’s) who don’t have Long-term Power Purchase Agreements (PPA’s) in place and are relying solely on the bid based energy trade, as there is not sufficient demand to accommodate such supply side surplus. 

All of this would penultimately hamper the revenues of the Distribution Companies (DISCOM’s) which can be attributed to two factors: 1) The revenues from the Residential and agriculture segment is subsidized and 2) The Industrial & Commercial segment which are charged higher will remain shut due to the lockdown and so the revenues would be hampered and delayed too, which would further aggravate the existential crisis of the debt ridden DISCOM’s 

COVID-19 is also expected to significantly affect energy storage and Electric Vehicle(EV) as ongoing demand disturbances and restrictions of labour movement in Asia cause interruptions  in production and supply.

In the near future, energy storage and electric vehicles (EV) are also expected to have a major and lasting effect on the pace of EV adoption, as the industry is facing a detrimental situation of lower oil prices that will postpone the break-even point for EVs and the inevitable recession would decrease overall car demand and discourage buyer from paying content premium needed for EVs.

The challenge faced by climate change persists even as policymakers are concentrating on the ongoing economic and health crises.

In India, distribution companies have a lower tariff for agricultural and domestic consumers as compared to that for industrial and commercial consumers. Thus, for several distribution companies, consumers paying lower tariffs are cross-subsidized by industrial and commercial consumers. The COVID-19 lockdown has resulted in shut down of all except essential commercial activities, As a result the electricity demand from the residential sector has increased while the commercial and industrial sectors have reduced significantly. According to the Power System Operation Corporation of India (POSOCO), energy demand reduced from March 25th to March 31st, 2020.

The important risks from the COVID-19 pandemic for the distribution companies in India are:

1. Loss of revenues due to reduction of demand from the industrial and commercial customers
2. Inability to cover the cross-subsidies provided to the lower-tariff paying consumer.
3. Have to consider the expense that they have  to comply with any ‘must buy’ commitments that they have with generators with long-term power purchase agreements.
4. At an operational level, distribution companies would have to account for deviation in demand and supply patterns at a temporal and locational level.
5. Finally, during this period, critical infrastructure such as electricity networks would have to be run with minimum employees 

The price of power at the day-ahead market of the Indian Energy Exchange (IEX) has reduced to 2.4 a unit. The total volume that has been cleared is 77 billion units in March against 147 billion units in February at an average Rs 2.9 a unit.

States have reduced purchase from several power plants. A lot of sellers became active on open market sales. This short-term purchase is not a good news for power producers as it not viable to generate and sell power at the existing low rates at these exchanges

The central government has also allowed deferment of payment by states to power generating stations. It also asked government-owned power generators to maintain seamless supply in spite of low or delayed payment. Three months of moratorium on payments from distributing companies to generating companies will put more financial stress on the generating companies which are struggling with low capacity utilisation and outstanding payments from distributing companies. As of January 2020, power distributing companies owed a cumulative Rs 86,813 crore to generating companies. The largest share is owed to central government-owned generating companies, Rs 30,941 crore.

References

1. Petrova, V. (2020, March 24). India allows green energy deferrals due to COVID-19. Website: Renewable Now. Retrieved from URL: https://renewablesnow.com/news/india-allows-green-energy-deferrals-due-to-covid-19-692121/
2. Centre asks states not to stop payment of Renewable Energy generators. (2020, April 20). Economic Times. Retrieved from URL: https://economictimes.indiatimes.com/small-biz/productline/power-generation/centre-asks-states-not-to-stop-payment-of-renewable-energy-generators/articleshow/74950550.cms
3. Hartmann, I. (2020, March 17). Impact of CoViD-19 on the Energy Sector. Energy Magazine. Retrieved from URL: https://www.energymagazine.com.au/impact-of-covid-19-on-the-energy-sector/
4. Shah, S. (2020, April 2). COVID-19: Clean energy Challenges and Opportunities. Standard Chartered. Retrieved from URL: https://www.sc.com/en/trade-beyond-borders/covid-19-clean-energy-challenges-and-opportunities/


Authors:

Ashish Rajendran, Shardul Sharma, Shahin Selkar, Shivani Karkera, Rohan Nandi, Anand Kumar, Chirag Thakkar, Raj Shah

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This blog has been designed and created by the aforementioned students of the Post Graduate Diploma in Management (Infrastructure Management) under the guidance of Dr. Samudra Sen, Assistant Professor at the Centre of Excellence in Energy at the Adani Institute of Infrastructure Management, Ahmedabad.