Letter of Credit for payment assurance to gencos to be routed through banks

The Letter of Credit (LoC) mandated to be offered by the Power Distribution Companies (Discoms) will be routed through the banking system.

After a recent order from the Ministry of Power, a letter of credit is to be given by the Discom to the Genco as an assurance of payment in lieu of power supplies.

“The LoC will be in the form of an assurance from a bank to pay the Power Generation Company (Genco) if the Discom defaults on payments,” an official told BusinessLine .

From August 1, the Power Ministry has made it mandatory for power distribution licensees to open and maintain adequate LoC as a payment security mechanism under Power Purchase Agreements (PPAs). This order for setting up the payment security mechanisms was issued on Friday. “The banks will give the letter of credit only if the Discom shows signs of improving billing efficiency and plugging losses. Only then will the Discom be able to make timely payment to the Genco. And this will be possible if the political dispensation starts discouraging non-payment by consumers and encourages moves to plug power theft,” the official said.

“Local leaders tend to encourage non-payment of bills by consumers and power theft while the State Governments tend to push back tariff hikes in a bid to consolidate their vote banks. This adversely affects the health of Discoms which fail to recover the cost of power supplied,” the official added.

“The PPAs have the provision regarding maintenance of adequate payment security mechanism, mainly in the form of LoC by the distribution licensees/procurers of power. A robust payment security system requires adequacy and validity of LoC to cover the payments due on account of drawal of power,” a statement from the Ministry of Power said.

“It has been seen that despite the above provisions, the LoCs are not being given and there is huge outstanding on account of unpaid power bills. This makes it difficult for the generators to pay for the fuel, which has to be pre-paid, to continue the generation,” the statement added.

Check on politicians

Officials said the idea is to make politicians in States accountable. “If the Discom is not able to buy power, then there will be load shedding. People will be unhappy, thus leading to political repercussions,” the official said. “And that will force State politicians to reform their power sector, cut losses, improve billing efficiency, among others,” he added.

As per the order, National, Regional and State Load Dispatch Centres are directed to dispatch power only after they are told by the power generating company and the Discoms that an LoC for the desired quantum of power has been opened and copies have been made available to the concerned generating company. The NLDC and RLDC shall be told the period and quantity of power supply. The dispatch shall stop once the quantum of electricity under the LoC has been supplied. The generating company is entitled to encash the LoC after the expiry of the grace period, usually 45 to 60 days, as provided in the PPA.

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