Govt has made it mandatory for discoms to offer letters of credit, as part of the payment security mechanisms
The move comes in the backdrop of the ongoing crisis in discoms due to their poor financial health
New Delhi: In an attempt to ensure timely payments by states to electricity generation utilities, the government has made it mandatory for state distribution companies (discoms) to offer letters of credit (LC) as part of the payment security mechanisms in power purchase agreements (PPAs).
Accordingly, the National Load Dispatch Centre (NLDC) and Regional Load Dispatch Centres (RLDC) have been directed by the Union power ministry to “dispatch power only after it is intimated by the generating company and distribution companies that a letter of credit for the desired quantum of power has been opened and copies made available to the concerned generating company." The provisions kick in from 1 August.
This comes in the backdrop of the ongoing crisis in discoms due to their poor financial health, which has resulted in delayed payment to generation utilities. The Centre is trying to step up efforts to supply 24x7 power to all.
The NLDC and RLDC will also specify the period of supply and the quantity of electricity, which should be equivalent to the value mentioned in the LC. The order added that the electricity flow to discoms will stop once the quantum of electricity under the LC has been supplied.
“This will change the system and the sector will become viable," said power minister Raj Kumar Singh in a statement. In the event of a stoppage of electricity supply due to non-opening of the LC by the discoms, they will be liable to pay compensation to the generator as per the terms of PPAs.
“The concerned generating company shall be entitled to encash the LC after expiry of grace period, i.e., 45-60 days as provided in the PPA," the order said, adding: “It shall also be ensured by the load dispatch centre that the regulated entity, during the period of regulation, has no access to procure power from the power exchanges and they shall not be granted short-term open access (STOA)."
As of September 2015, the total debt of all state-owned discoms was around ₹2.45 trillion, with ₹0.8 trillion serviced by the states. Also, the annual discom losses in FY16, FY17 and FY18 were funded through borrowings.
The development comes at a time when non-performing assets in power generation account for around 5.9% of the banking sector’s total outstanding advances of Rs4.73 trillion, according to the Economic Survey 2016-17 released last August.