The Ministry of Power (MOP) and MNRE have issued a couple of emphatic orders to tackle the growing DISCOM payment crisis. The first is an MOP order in end June instructing State Load Despatch Centres (SLDC) and Regional Load Despatch Centres (RLDC), entities responsible for scheduling and issuing despatch instructions for all power, to allow despatch of power only if the DISCOMs have opened requisite letters of credit (L/C) in favour of the power generators. The order became effective on 1 August 2019. An exemption has been provided for power purchased from the state-government owned generators. MNRE has now issued a clarification stating that the tariff payable under solar, wind and small hydro PPAs shall be treated as ‘fixed charge.’
- DISCOMs are in a parlous state because of constant political meddling, poor governance and pressure to keep tariffs low;
- There are many operational and legal glitches to the central government’s retrospective approach to address this problem;
- The long-term solution lies in separating content and carriage, and developing a consistent national regulatory framework for power distribution;
Each PPA, irrespective of contract term or type, already has a clause requiring the power purchaser to furnish an L/C to the generator – MOP has merely required the power purchasers (DISCOMs) to comply with contractual terms agreed with the generators. The order was necessitated because despite contractual agreements, most DISCOMs shockingly did not open any L/Cs and then resorted to excessive payment delays. This is believed to be the case even in most renewable energy projects including where the DISCOMs have signed PPAs with SECI and NTPC (it is hard to comprehend why investors and lenders have let the situation come to this).
There are many operational and legal glitches to the central government approach. The bankrupt DISCOMs do not have the financial capacity to provide L/Cs. Their failure to do so may result in forced curtailment and loss of revenue for the RE power generators. It remains to be seen if the SLDCs and RLDCs have the necessary operational capacity and authority to comply with the MOP order. There is reason to fear that the SLDCs, part of the state-government owned transmission companies, may simply refuse to comply with the central government orders and legally, they may be entitled to do so. If power is not despatched because of a DISCOM’s failure to provide L/Cs, MNRE wants it to pay full applicable tariff to the generators. But it is not clear if these revised rules can be enforced on the existing PPAs.
It is important to bear in mind that the DISCOMs are in such a parlous state because of constant political meddling, poor governance and pressure to keep tariffs low. Delaying payments to generators has helped them to manage their working-capital cycle and meet other payment obligations. The state governments are unlikely to be able to provide financial support because of their own fiscal constraints. The DISCOMs may, therefore, be forced to suspend capital works, network upgrades or restrict power supply to low-paying residential and agricultural consumers.
It is too early to say how the MOP and MNRE moves will play out. Our quick field survey shows that some SLDCs may already be disregarding the MOP order.
The long-term solution to DISCOM payment crisis lies in taking away the incentive (or the power) of local governments and regulators to meddle in power distribution. Content and carriage need to be separated, and we need a unified national regulator to enforce rules consistently across the country. It can sometimes take a crisis to fix things. We hope that this crisis does not go to waste.