In a bid to bring a payment security mechanism for the power sector and secure dues of the power generating companies from the distribution companies (Discoms), ministry of power has released a circular directing distribution to open letter of credit (LoC) for a shorter duration of at least 1 week to 15 days.
When distribution companies delay payment to generating companies, letter of credit is issued to guarantee payment from the bank in case discom defaults.
In case discoms have difficulty opening LoC, it may pay dues in advance electronically and quantum of power supply by load dispatch centre will be limited to money deposited to the generating company. If discoms fail to maintain both LoC and advance electronic payment, the power supply will be stopped to the particular state.
“Getting a sustainable return is important for long-term investors. Union power ministry’s advisory to the discoms on payment security mechanism is in the right direction, provided states adhere to it. Keeping in mind the growing receivables that are creating significant stress in the power sector, this is a welcome move,” said an industry source.
On June 28, union power ministry released an order reiterating that starting August 1, 2019, as per Electricity Act of 2003 and power purchase agreements (PPAs) between distribution and power generating companies, discoms need to maintain a letter of credit if there is a huge amount due on account of power bills.
Power purchase agreement allows power generating companies to encash the LoC after the expiry of the grace period of usually 45-60 days.
The southern states like Karnataka, Tamil Nadu, Telangana and Andhra Pradesh have written a letter to RK Singh, power minister for deferment of the order. The letter quotes, “Most of the discoms of southern region states are in deep financial stress and opening and maintenance of adequate LoC at this juncture may not be viable. Implementation of the order from 01.08.2019 may have serious implication on power supply position of the states. Request Power Ministry to defer implementation of the order.”All India outstanding for the supply of electricity at the end of May 2019 by the distribution companies to the power generating companies stands at Rs 38,933 crore, of which Rs 22,362 crore is an overdue amount for over 500 days.
States Overdues to Gencos at the end of May ’19 (Rs Cr) Outstanding at the end of May ’19 (Rs Cr) Andhra Pradesh 661 1,519 Telangana 2,119 3,468 Karnataka 3,351 4,446 Tamil Nadu 3,372 5,289 Source: PRAAPTI portal