Bankrupt DISCOMs plus Covid-19 a disastrous mix

08 April 2020 |

Coronavirus lockdown and consequent slowdown in power demand are striking at the core of the power sector in India. A cascading series of litigation and payment defaults by end consumers, DISCOMs and power producers seems underway. To make matters worse, there is pressure on the DISCOMs to reduce tariffs and/ or offer payment concessions to consumers. In an unprecedented move, Maharashtra regulator has cut tariffs for all consumer categories by 7-24% for all DISCOMs in the state for a period of five years. The state regulator has also offered a three-month moratorium on fixed charge payments to C&I consumers. Uttar Pradesh has similarly provided a fixed charge deferral and more states are likely to follow suit.

  • Delayed payments to power producers seem like the only route available to DISCOMs for financing higher losses and working capital requirement;
  • Prolonged weakness in power demand poses risk of cancellation to ongoing tenders, higher curtailment and slowdown in rooftop solar and open access markets;
  • The government ought to ensure compliance with core tenets of timely payments and no curtailment for sustained sector momentum;

What makes this crisis really difficult is the weak position of DISCOMs at the outset. With banks already unwilling to lend to them, there are no easy options for them to fund operational losses and higher working capital requirement. Public funding seems improbable due to stretched financial position of the state governments. That leaves the default option of delayed payments to power producers, which must ring alarm bells for lenders and investors in the sector.

Table: Snapshot of aggregate DISCOM financial performance

Source: India’s Power Distribution Sector Needs Further Reform, IEEFA, March 2020

Other likely consequences of the current situation seem equally unsavoury.

Slowdown in renewable power procurement

Unless power demand jumps back to normal levels fairly quickly, it is inconceivable that the DISCOMs would be willing to procure even 10-12 GW of new renewable power over the next year. Recently completed auctions where execution of PPAs and/ or regulatory tariff approvals are still pending (4,000 MW manufacturing tender and 1,200 MW peak power tender, amongst others) are also at risk in our view.

Higher curtailment

States have already started resorting to large scale curtailment under the pretext of force majeure protection. MNRE has issued a couple of advisories to state governments and DISCOMs on enforcing ‘must-run’ status for renewables but such advisories hold little sway in these times.

More resistance to rooftop solar and open access

The DISCOMs need their high-paying C&I consumers more than ever and would use every trick possible to hinder growth of these markets.

With far too many conflicting and seemingly more urgent priorities (jobs, healthcare, economy, bank solvency), the government would seem unlikely to have political or financial will to recapitalise DISCOMs or institute much anticipated power sector reforms. It is now nearly a year since formation of the new central government. We believe that the opportunity to take tough measures may have been lost.

But now more than ever, we need to place a premium on environmental and operational value of renewables (low operating risk, simple value chain, high energy security). The government ought to ensure compliance with core tenets of timely payments and no curtailment for sustained sector momentum.

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