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Photo: Reuters
Photo: Reuters

Continuing financial logjam at discoms casts a shadow on electricity producers

  • NTPC, despite its fool-proof agreements with state utilities, may feel the heat as well
  • The aggregate technical and commercial losses (AT&C) stood at 19.72% of electricity purchases

While the government may have succeeded in improving the availability of electricity in India, the lack of focus on other areas, such as distribution losses and timely payments, can delay the revival of the power sector.

The aggregate technical and commercial losses (AT&C), which reflects transmission and collection efficiency, stood at 19.72% of electricity purchases, according to the latest government data for 26 states. The Ujwal Discom Assurance Yojana, a scheme targeted to turn around the moribund power distribution companies (discoms), had targeted to reduce these losses to 15% by the end of 2018-19.

The scheme did yield some benefits. All India AT&C losses before the introduction of the scheme amounted to 22% in FY14. Transfer of debt from discoms to state governments reduced their financial burden, and facilitated electricity purchases. But with high losses continuing, discoms are hitting a financial logjam again.

Signs of trouble emerged in 2018, when companies, such as NTPC Ltd, started witnessing payment delays. But now the situation seems to have scaled to such high levels that the industry body (Association of Power Producers) is seeking government intervention.

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From 14,864 crore at the end of FY18, the total outstanding amount receivable from discoms jumped 75% to 26,267 crore by 31 December 2018, shows data from a government portal on payments. While producers will be allowed to charge extra for payment delays, the bigger worry is the underlying stress. If unaddressed, then discoms can eventually temper electricity purchases, warns Dhruv Muchhal, an analyst at Motilal Oswal Securities Ltd. Of course, state governments may not let the situation deteriorate ahead of the general election. But unless the government gives more financial support and beefs up payment collection methods, the nascent recovery in the power sector can be undermined. The impact will be more pronounced on independent power producers, who are already complaining through their industry association.

NTPC, despite its fool-proof agreements with state utilities, may feel the heat as well. The payment delays are stretching its working capital, and increasing expenses. While improving domestic coal supplies will help address some investor concerns, the earnings benefits can be undermined by the rise in financial costs.

“NTPC coal stock at power plants have been improving since January and is currently at 20 days vs 9 days in November, 2018, while generation lost due to coal/operations and maintenance are down by around 70% QoQ," JM Financial Institutional Securities Ltd said in a 28 February note. “However the working capital-related interest cost under-recovery on railways advance and delayed payments from discoms may continue to impact 4Q FY19 earnings."

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