Take, for instance, the first 9 months of 2013-14: power demand grew merely at 1% as key infrastructure and manufacturing sectors such as capital goods, cement, metals, mining, and auto operated at low capacity utilisation.
This is only a harbinger of things to come.
CRISIL Research estimates power demand growth to be tepid at 5.4% CAGR over 2014-2018 as compared to 6.2% CAGR over the last 5 years. Demand growth, particularly from the industrial and commercial segments, is expected be subdued at 4-4.5% due to muted GDP growth. The slowdown in overall power demand is despite healthy growth of 9-9.5% CAGR from the domestic segment led by significant latent demand as well as strong substitution demand due to gradual shift to grid power from diesel-based generation. Over 2008-09 to 2012-13, the power demand to GDP growth ratio was 0.9. Over the next five years, this ratio is expected to dip to 0.8, based on our expectations of slower demand growth of 5.4%.
Demand growth is expected to lag in the Western region as states such as Maharashtra, Gujarat, Madhya Pradesh and Rajasthan are already power surplus or are expected to have zero deficit in the near term on the back of healthy capacity additions. However, we expect demand growth to be healthy in the Southern and Northern regions, which had a higher base deficit of 7-8% as against a national average of 4.5% in the first nine months of 2013-14.
In the past, demand growth has been restricted due to low power availability on account of lack of generation capacities. Moreover, weak financial position of state discoms also constrained their ability to purchase power. However, over the next 5 years, power generation is expected to grow at a faster pace of 7-7.5% CAGR led by capacity additions. Also, the financial position of discoms is expected to improve with tariff increases and significant reduction in interest costs (on implementation of the financial restructuring plan) leading to higher power offtake. The recent tariff cuts undertaken by states such as Delhi and Maharashtra are not sustainable due to the stretched financial position of states as well as discoms. Thus, for the first time in many decades, while power availability is expected to improve, demand growth is projected to slow down.
Muted power demand growth coupled with limited domestic coal availability is expected to restrict the increase in plant load factors (PLFs). In fact, in 9M 2013-14, these issues resulted in PLFs declining by about 450 bps (yoy) to 65.3%. Given that demand growth is expected to improve only post 2014-15 with a gradual revival in economic activity, CRISIL Research estimates overall PLFs of coal-based plants to reach only 71-73% by 2017-18 as compared to the highs of 77-79% seen during 2008 to 2010.
We believe that the PLF of new domestic coal-based plants will remain lower, increasing only to 66-68% by 2017-18. This is due to slower demand growth and aggressive bidding, which will restrict the use of high-cost imported coal given limited domestic coal availability. Thus, returns of most competitively bid power projects are expected to be adversely impacted.
We believe that the anticipated weakness in PLFs is expected to discourage investments, particularly in greenfield power projects. Given weak demand, state distribution companies are expected to tread a cautious path before signing fresh power purchase agreements as existing contracts are also not effectively utilised. Moreover, returns of new power projects are expected to be under pressure as highlighted earlier. As a result, we expect many announced projects which do not have requisite clearances and firm fuel supply agreements to be scrapped or postponed. Consequently, capacity additions in power generation are expected to slow down to 55-60 GW over 2013-14 to 2017-18 as compared to 64 GW in the last 5 years.
The author is senior director, CRISIL Research