Ministry of Power’s directive on payment security mechanism is positive for power generation companies: ICRA

As per ICRA note, the ministry’s direction on the payment security mechanism, once implemented, would certainly be positive for power generation companies, given that this in turn is expected to result in an improved payment pattern from the discoms.

Jul 04, 2019 10:07 IST India Infoline News Service

The Ministry of Power has issued directions to the National Load Dispatch Centre (NLDC) and Regional Load Dispatch Centres (RLDC) to schedule and dispatch power from generation companies to distribution utilities (discoms) only after implementation of payment security mechanism. This should be in the form of letter of credit (LC) by the discoms to the generation companies for the scheduled quantum of power, with effect from August 1, 2019. This is following the continued delays in making payments by the discoms to generation companies, leading to liquidity constraints for the power generation companies. While the power purchase agreements (PPAs) and power sale agreements (PSAs) tied-up between the generation companies and discoms have the provision for payment security mechanism in the form of LCs, the provision was not implemented by the discoms in most of the states.

As per ICRA note, the ministry’s direction on the payment security mechanism, once implemented, would certainly be positive for power generation companies, given that this in turn is expected to result in an improved payment pattern from the discoms.

Sabyasachi Majumdar, Group Head - Corporate ratings, ICRA Ltd, says, “Though this auger well for the power generation companies, the implementation of these provisions remains to be seen, given the challenges in securing the large quantum of LCs by the discoms, in view of the loss-making operations of the discoms in majority of the states.  More importantly, cash flow improvement in a sustainable manner is critical for discoms, which requires adequate tariff revision, operating efficiency improvement and timely subsidy support from respective state governments.”

The directive issued by the Ministry of Power states that the power dispatch to the discoms shall be curtailed in case of non-availability of LC or exhaustion of LC in relation to the quantum of power supplied. Further, the load dispatch centres are required to ensure that the discoms are not allowed to procure power from the power exchanges or through short-term open access because of curtailment in supply due to inadequate LCs. Moreover, the discoms would continue to be liable for making payment of fixed charges under the long-term PPAs. However, clarity is required on compensation payable to renewable energy projects having single-part tariffs under the PPAs with discoms.

While the stricter directive issued by the Ministry of Power is a positive step for the sector, the implementation of these provisions remains dependent on the support extended by the state governments to the discoms. This measure may face resistance from the state governments, given that the non-provision of LCs would lead to supply curtailment and in turn load shedding in the distribution license area.

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