|The downstream effects of Force Majeure Arundhati here. I don’t know if you’ve noticed, but many companies are invoking something called Force Majeure. Essentially, Force Majeure is a common clause in contract law. It allows a party to limit their liability due to unforeseeable, extraordinary events. Maybe a hurricane hit the stadium, cancelling a game. Force Majeure. An earthquake brings down a building. Stuff like that. Right now, companies are invoking Force Majeure for…yes, Covid-19. However, companies rarely work in isolation. As the coronavirus continues to disrupt most businesses, the real question is…what happens to the chain when one or more companies walk away citing Force Majeure? What are the second order effects of Force Majeure? Let’s take a few examples. For instance, India’s largest two-wheeler company, Hero Motocorp, recently said it can’t pay its vendors and suppliers their dues as sales have come to a standstill. This makes sense for Hero, which is probably using its cash reserves to pay its own employees. So what happens? Simple. The suppliers invoke Force Majeure as well with their suppliers. And down the chain it goes. Where does it end? At the most vulnerable part of the supply chain, the MSMEs (Micro, Small and Medium Enterprises) who are the starting point of the auto supply-chain. Remember, MSMEs were already reeling.|
|Mahendra Sanghi, Ex-President, Assocham and Group Chairman, Sanghi Group of Industries says the impact will ruin MSMEs in the coming days. “While we are trying to cope with demonetisation and teething and compliance issues of GST, this virus has come. It is definitely, the worst time that the virus has hit us,” Sanghi says.|
|That’s one second order effect of Force Majeure — it transmits down the chain until it stops with the party that cannot afford to invoke Force Majeure, or for the most part, is the most vulnerable. Which brings us to the bigger problem. When can Force Majeure be invoked? The law is a little vague, but here’s what one interpreter of it says:|
|The party seeking to invoke force majeure clause provide notice to the other party as soon as it became aware of the force majeure event, and should concretely demonstrate how the said situation has directly impacted the performance of obligations under the agreement.|
|Notice how there’s no indication of who can invoke it. |
And the sector that’s exploiting this definition to the fullest is the oil sector. Recently, this is what Business Standard reported:
|Consumers had opted for force majeure notices to gas marketers like GAIL, Indian Oil (IOC) and Gujarat State Petroleum Corporation (GSPC), after their commercial operations and factories were shut following the lockdown. After this, GAIL, too, had issued similar notices to its suppliers like ONGC, Oil India and Petronet.|
|Okay, so consumers are opting for force majeure on gas marketers, who are issuing the same to their suppliers. There’s more.|
|Then India’s top refiner Indian Oil Corporation, too, has declared force majeure on crude purchases from four of its biggest suppliers – Saudi Arabia, Iraq, UAE and Kuwait – as refinery run rates have been cut down in view of the plummeting fuel demand.|
|Wow. Okay. |
So apparently, you can declare force majeure against countries? The background to this is that thanks to a price war, Saudi Arabia and Russia have been slashing oil prices since the beginning of this year. And things only get worse with low demand.
Which brings me to the other second order effect of force majeure — companies invoking it randomly to get out of fiduciary obligations. The best example of this is the Uttar Pradesh Power Corporation Limited (UPPCL), which basically went back to its suppliers, and said, sorry, we can’t pay you because of force majeure. And one of the suppliers, The Solar Energy Corporation of India was having none of it.
|The notice claimed that the lockdown is likely to affect a significant proportion of consumers’ capacity to pay electricity bills on time. Eventually, there will be a ripple effect reaching the upstream utilities in the power sector value chain. In its response to the UPPCL, SECI explained that the force majeure event the DISCOM sought was not for the non-availability of power generation capacity but for its inability to collect dues from its consumers as per the power sale agreement (PSA) between the two parties|
|In essence, SECI was saying, Force Majeure is for situations that prevent delivery or supply, both of which are unaffected. It cannot be invoked because you think you won’t get paid by your consumers. As a developer who didn’t wish to be named said to The Economic Times:|
|“The power purchase agreements, which have been signed between distribution companies and power plants, have to be the guiding force in all circumstances. Discoms cannot claim force majeure since the projects are operational and are willing to supply power,”|
|Power distribution companies in India are already staring at a mountain of debt ahead of them—around Rs 4,30,000 crore ($56.2 billion)—largely due to delayed payments, issues around tariff rationalisation, and constraints emanating from subsidy disbursement. Multiple options are being figured out. The real question though, is, for how long will this continue? And who decides which force majeure clauses are valid, and which ones are arbitrary? Is it the government? The judiciary? Deep questions. Speaking of the power sector, Rohin has a piece on something special that happened in India last night.|
|“Black Bear” If an alien landed on earth and read this post on Reddit’s India channel, what would it think?|
|Keep your lights on as civil disobedience on 5th April at 9pm By keeping your lights on, you are not breaking any law but doing your part in protesting against the empty gestures of the Central Government. We are the citizens of this country, not his social media tools. Enough is enough.|
|For those of you who aren’t aliens or Indians, here’s the quick context: India’s prime minister Narendra Modi made an appeal to the country via a video message on Friday. He wanted a country of 1.3 billion people to turn off all the lights in their homes. And then step outside with candles and torches.|
|“This Sunday, on the 5th of April, we must all together, challenge the darkness spread by the corona crisis, introducing it to the power of light. On this 5th of April, we must awaken the superpower of 130 crore Indians. We must take the superresolve of 130 crore Indians to even greater heights,” he said in a video message to the nation. “On the 5th of April, on Sunday, I want 9 minutes from all of you, at 9 pm. Listen carefully, on the 5th of April, at 9 pm, turn off all the lights in your homes, stand at your doors or in you balconies, and light candles or diyas, torches or mobile flashlights for 9 minutes. I repeat, light candles or diyas, torches or mobile flashlights, for 9 minutes at 9 pm on the 5th of April,” he added.|
|I have a quick request: don’t think of a white bear. Okay? Okay.|
By the time you read this, the Indian PM’s rather creative way to exhort his country, which is just entering the second of a debilitating 3-week lockdown, would have passed. Hopefully incident-free. Yes, incident-free. Because it turns out that if the elected leader of 1.3 billion people asks them to switch off their lights for 9 minutes, massive second and third order effects are thrown in motion. From Prince Mathews Thomas at Moneycontrol.
|It’s like suddenly putting a brake of a car in motion, or suddenly pushing the accelerator to the floor…it is difficult to predict how the car will exactly behave. It is the same predicament, but much more complicated, that we all are facing,” said a senior executive from the power sector.|
Something similar to what happened in the 2012 blackout – the biggest in the world – when a sudden surge in demand led to tripping and almost 600 million Indians went without electricity.
On April 5, instead of demand, the danger is of supply surging and disrupting the frequency when Indians switch off lights all at once at 9 pm. This could trip the line, and lead to a blackout. Moneycontrol
|The power minister for the state of Maharashtra, India’s second most populous state, warned that a synchronised 9-minute reduction in power consumption might lead to “a multi-state grid collapse and result in blackout in the entire country.” |
Other states too warned of it as well.
Remember I’d asked you to not think of a white bear? Just wanted to remind you.
Anyhow, all Indian state and central electricity generators, distributors, and grids are girding up for a 9-minute black swan event. By proactively shutting down power plants and cutting off power to consumers.
|Reduction in power demand as a result of switching off lights at 9 pm for 9 minutes on Sunday will suddenly reduce power demand by 12,879 MW at a go, Power System Operation Corporation Ltd (POSOCO), the national power grid operator, has estimated in an advisory sent to regional grid control units. In the advisory POSOCO said that unlike normal operation, this reduction in load of the order of 12-13 GW would happen in 2-4 minutes and recover nine minutes later within 2-4 minutes.|
POSOCO has termed this event ‘unprecedented’ and said it will have to be handled through reduction in generation of hydro and gas resources. Economic Times
|The government seemed to have realised the scale of the unintended consequences quickly. The very next day, it clarified that citizens were only meant to switch off their lights, not their appliances like computers, television sets, fans, refrigerators and air conditioners. This is important: the government explicitly told citizens to not switch off all their appliances. Because that could threaten the stability of India’s electricity grids. But what if citizens are more worried about the safety of their appliances, in a still developing country whose quality of electricity supply was ranked 80th globally?|
|How to Protect Your Gadgets from a Likely Power Surge This Sunday While power companies are fairly confident that they can prevent the grid from collapsing, there is the possibility that the sudden excess grid voltage could cause a power surge. That’s one part of it – possible high voltage availability when the lights go out, which could affect other connected gadgets. And then there’s the sudden power demand when all the lights come back on. It’s a demand and supply game. […] If all else fails, just unplug all your devices. It is one of the most basic ways to protect them from a power surge. Do that a few minutes before 9 pm and plug them back a few minutes after 9.09 pm.|
|Thus, the massive unintended consequence arising from the PM’s announcement. Indians switching off their appliances ahead of Sunday’s 9-minute lights blackout, in order to… Avoid getting them damaged due to a power fluctuation, which they Might end up causing through their efforts to protect themselves Twitter had multiple such examples.|
|Let’s hope that by the time you’re reading this, India’s electricity grids have managed to survive their manmade 9-minute black swan event. And those people who might have left their lights and appliances on as “an act of civil disobedience”? They would actually be the true patriots. Ironic, isn’t it? Which is a great segue for me to introduce you to the wonderfully titled “ironic process theory.”|
|Ironic process theory, ironic rebound, or the white bear problem refers to the psychological process whereby deliberate attempts to suppress certain thoughts make them more likely to surface.|
An example is how when someone is actively trying not to think of a white bear they may actually be more likely to imagine one.
“Try to pose for yourself this task: not to think of a polar bear, and you will see that the cursed thing will come to mind every minute.” — Fyodor Dostoevsky, Winter Notes on Summer Impressions
|I know, it’s not an exact match in India’s case today. But think about it – by asking Indians not to switch off their appliances, the Indian government could actually end up making many do exactly that. What’s the opposite of a white bear? Over to Ranjan, who will take you through the home stretch.|
|WHO is resilient? Taiwan, that’s who. It’s emerging that Taiwan’s response to Covid-19 has been amongst the best globally. In a plot twist for the ages, one of the key factors behind this is that the World Health Organisation does not recognise Taiwan. Imagine that. China, which claims Taiwan as part of its ‘One China’ policy, blocks the island state from being part of international organisations like WHO or the UN. If you asked the WHO about this, they’d tell you this strange equation doesn’t really affect anything on ground. Taiwanese officials, though, tell a different story. They claim to have reached out to the WHO for information on 31 December. This was the same day Wuhan officials announced the discovery of a new strain of viral pneumonia—what we know today as Covid-19. Taiwan received no response from the WHO. So Taiwan decided to take matters into its own hands. The same day it reached out to the WHO, it began screening people entering the country. On 16 January, its health officials visited Hubei, the province the virus originated from. They reported back that things were more serious than either the Chinese government or WHO were letting on, relaying fears of human-to-human transmission. By the time China confirmed the same four days later, Taiwan’s Covid-19 response was already up and running. (It was only on 30 January that WHO declared the virus a global health emergency.) Drills were held at hospitals, while the country also put together a quarantine strategy. It also ramped up the production of protective masks, producing millions of them daily and temporarily banning their export. This has been so successful that Taiwan has even begun donating millions of masks to other countries. Taiwan reported its first case of coronavirus on 21 January. This is just days removed from countries such as the US and Italy. Since then, Taiwan has seen under 350 positive cases and just five deaths. The US and Italy, on the other hand, have emerged as coronavirus hotspots, with tens of thousands of cases and thousands of deaths. Interestingly, while Taiwan had its act together by 21 January, it wasn’t invited to WHO’s emergency response meeting held the following day. As it turns out, WHO’s step-motherly treatment of Taiwan may have hurt the world more than it did Taiwan|