India’s energy needs have always remained exhaustive and, as a result, the power sector’s desired pace of growth has been the biggest challenge for the Indian economy. With an estimated population of more than 1.3 billion and the Government of India’s recent policies to strive for 24x7 power for all, it is but natural that the country is faced with an ever-increasing demand for energy. As per the CEA’s June 2019 report, India currently has an installed capacity of around 357.88 GW with the private sector accounting for 46.4 percent of this capacity.
Private sector participation in the power sector has seen a series of reforms in the past decade, albeit encountering major roadblocks ranging from land acquisition issues to coal shortage. One such hindrance has been the lack of proper implementation of the payment security mechanisms in the power purchase agreements (PPAs) and recovery of dues from the distribution companies (discoms).
The PPAs govern the relationship between the buyer and the seller with regard to the purchase of electricity by the buyer from the seller’s power plant. The buyers are typically discoms that are owned and controlled by the state and are responsible for distributing electricity at the state level. These discoms have been burdened with heavy debts due to their practice of selling power below the actual cost, billing and collection issues and AT&C losses. Consequently, the payment of tariff to the power-generating companies is more often than not delayed, which leads to failure in servicing their debts. As the power generating companies are committed to pay the coal companies and the railways in advance for their stock of coal and rakes, any delay in payments by discoms affects the overall dynamics of the sector. This, coupled with protracted litigation on tariff -related issues, has been a major impediment to the power sector’s growth. According to a recent report by Crisil, the dues owed by the discoms to the generating companies in India in the two years through May 2019 recorded a monthly average of Rs 21,000 crore.
Curbing delayed payments
It is in the context of these mounting dues that, recently, the Ministry of Power issued a couple of directives to ensure timely payments by discoms and thereby resolve the issues faced by stressed thermal power projects.
(a) Directives issued on June 28, 2019 (as amended on July 17, 2019) to discoms to open and maintain adequate Letter of Credit (LC) as per their PPAs, failing which the national Load Despatch Centre (LDC) and regional LDCs have been directed not to schedule power to the defaulting discoms, effective August 1, 2019, namely:
(i) Power is to be scheduled by the LDC only after receipt of a written intimation from the discom that LCs of the desired quantum of power have been opened and the generating company confirms the same.
(ii) The LC may be opened as per the PPA with the discom having the option to open the LC for a shorter duration, for instance, supply corresponding to requirement for a week or fortnight. In case of difficulty in opening LCs, the discoms may pay in advance by electronic mode, the amount equal to at least one day’s purchase of electricity and inform the LDC accordingly. The quantum of power scheduled shall be limited to the quantum of money deposited.
(iii) Non-maintenance of adequate LC, or advance payment by discom in respect of a generating station, shall result in LDCs withholding power to the discom from the generating station.
(iv) Defaulting discoms shall neither be allowed to procure power from the power exchanges nor granted short-term open access.
(v) The state generating companies are exempted from the dispensation in the MoP directives.
(b) Directives issued on August 5, 2019 (pursuant to the recommendation by the High Level Empowered Committee) prescribing the mechanism to be followed by generating companies to ensure that the net surplus generated after meeting the operating expenses are used for servicing debt in the first place, namely:
(i) In case a developer uses linkage coal pursuant to the amended SHAKTI Policy, the Trust and Retention Account (TRA) mechanism must be put in place and all revenues generated shall be deposited into the TRA.
(ii) The lead banker (or any bank in case of NBFCs) may be assigned the role of the TRA agent. Lenders shall appoint a Cash Flow Monitoring Agency (CFMA) to verify the cash flow and actual costs incurred; the Agency may be the Lenders’ Financial Adviser and Engineer/Project Manager.
(iii) Expenditure allowed from the revenue deposited in the TRA shall be prioritised in the following order: statutory payments, fuel costs, transmission expenses, O&M expenses, interest payment to lenders, and finally principal payment to lenders.
Effects of disciplinary measures
The aforesaid directives have tightened the noose on the already precarious financial health of the discoms, which has led to the discoms approaching banks for funding to meet the disciplinary measures. At the same time, the MoP directives have come as a respite for the generating companies and lenders who now have some certainty in respect of the monies to be received. The typically long credit period enjoyed by the discoms for paying their dues to these generating companies is thus curtailed. The move also has the potential to attract investments in the sector which have been sluggish due to payment problems faced by the generating companies and the lack of timely servicing of debts.
However, the MoP directives do not seem to have addressed the issues of past dues to the generating companies which have accumulated over the years. The recovery of these overdue amounts by the generating companies may be a challenge, as the discoms may defer the outstanding payments due to the dispensation of maintaining LCs for procuring power. If this exemption encourages the discoms to procure power from the state-owned generating companies, it may also result in stranded capacity of the private generating companies. For instance, in Andhra Pradesh, the government has accorded a sanction of approximately Rs 557 crore towards the payment security mechanism to be furnished by the Andhra Pradesh discoms only for Central Generating Stations and not for private generating companies.
Perhaps the time is ripe to consider increased private sector participation to resurrect the discoms with commensurate returns for investors. This would increase competition while ensuring uninterrupted and reliable power supply to consumers -- advantages that may not be possible under the current dispensation which may allow the discoms to resort to partial load shedding to keep a check on their debts.
The MOP’s directives are sure to have an impact on the power sector, especially in the context of the mounting dues of the discoms. The next few months are slated to be a crucial phase to see how the disciplinary measures pan out in the current scheme of things.
Akshat Jain is Principal Associate at J. Sagar Associates. The views expressed in this article are personal.