The Power Sector in India is no stranger to crisis. It has suffered from payment delays, particularly by the State owned distribution companies (Discoms); bankruptcy of large generation capacities; and vexatious regulatory inconsistency. Even then, the challenges precipitated by Covid-19 and the consequent nationwide lockdown are unique and devastating, and is threatening to push an already moribund sector over the edge.
The lock-down which now looks like it will be extend till at least the end of April, has caused a massive drop in electricity demand (20-22% in the first 10 days of the lockdown). There has been a sharp decline in the electricity consumed by industrial and commercial consumers as well as the railways. Since these consumers cross-subsidize domestic and agricultural consumers, the revenue loss is even more significant.
The Ministry of Power (MoP) has recognized that Discoms face a liquidity crisis of mammoth proportions and has attempted to cushion some of the blows. The MoP passed directions under Section 107 and 108 of the Electricity Act, 2003 to the Central Electricity Regulatory Commission (CERC) and the state regulators to waive or reduce the late payment surcharge (LPS) under power purchase agreements (PPAs). The MoP also allowed a reduction of 50% in the letter of credit mechanism required to be maintained by the Discoms when scheduling power.
Conversely, the MoP has insisted that generators and transmission entities ensure that plants are operating and continuous power is being generated. Further, public sector owned generators and transmission companies have been instructed to not take any adverse action (including stopping supply of power) against the Discoms, even if they have large outstanding dues.
A number of Discoms citing their inability to recover funds from their consumers, have invoked force majeure clauses under their PPAs, claiming exemption from the twin obligations of (a) purchasing power under the PPA; and (b) making necessary payments under the PPA. A number of generators have been told that the electricity generated by their plants will not be scheduled.
The MoP has now clarified that Discoms will have to continue to pay for power within 45 days of presentation of bill. The MoP has also stated that the Discoms cannot invoke force majeure for non-payment of amounts to generators.
The CERC has through an order on 3 April 2020, reduced the LPS on bills presented between 24 March and 30 June, 2020, for which payments have been delayed beyond 45 days from 1.5% to 1%. The CERC however, did not allow any moratorium on payment by the Discoms and insisted that even though the Reserve Bank of India (RBI) has allowed banks to grant a moratorium period for repayment of all loans between 24 March, 2020 and 30 June, 2020; and deferred interest on working capital facilities for this period, interest will continue to accrue and the generators will continue to have fixed and other costs. Accordingly they need to be paid for the power supplied.
For power purchased through a competitive bidding process (which is a majority of the private power sales), the CERC’s decision on late payment surcharge does not apply. In fact the CERC’s order clarifies that relief from late payment surcharge would have to be claimed in terms of the force majeure provisions of the relevant PPA. Therefore the force majeure saga with respect to power procurement appears to be far from over.
An interesting aspect that needs to be mentioned is that with respect to renewable energy projects the Ministry of New and Renewable Energy has taken a far more pro-generator stance; insisted on protecting the “must-run” status of renewable projects and rejected any claim by Discoms of force majeure under the renewable PPAs on account of lack of finance or funds.
What emerges from the various developments is that the Government has concentrated on relief to the Discoms. Unfortunately, no benefits or concessions have been announced for the generators. There is no financial assistance (other than the RBI moratorium discussed above) made available nor are the generators getting wage or other similar support. Simply put, unless the Government takes steps to address the concerns and the cash flow issues of the generators this crisis will spiral out of control and have a long term impact on the sector.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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