Column: Power sector’s pangs

Feb 10 2014, 23:00 IST
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Tepid power demand will discourage investments in greenfield projects Tepid power demand will discourage investments in greenfield projects
SummaryTepid power demand will discourage investments in greenfield projects

Talking about a looming slowdown in power demand may seem heretical at a time when power outages or planned load-shedding are commonplace in most areas of the country. Yet, that is precisely what is on the anvil, thanks to the sharp slowdown in economic activity.

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,

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