New payment security mechanism to benefit power-generation companies : CRISIL

A report by CRISIL stated that the new payment security mechanism will benefit power-generation companies (gencos). It said that these companies are expected to get payments within the expiry of the official credit period in the region of 45-60 days.

“The implementation of the order is set to benefit generators, as the power supplied to discoms is conditional upon the opening of an LC (Letters of Credit). This is for an amount adequate to cover the entire quantum of power to be supplied. Once an LC is opened, it will be communicated to the National Load Despatch Centre (NLDC) or Regional Load Despatch Centres (RLDC), enabling gencos to recover any overdue amount by invoking the LC when a discom (electricity distribution company) doesn’t pay on time,” CRISIL noted.

The problem is aggravated by the requirement of upfront payments to be made to Coal India Ltd and the railways for supply of coal for power generation, CRISIL added.

In June, the power ministry had issued a directive to electricity discoms to mandatorily provide LCs to generation companies. Hence, they come up with a new payment security mechanism under Power Purchase Agreements (PPAs), signed with these companies. The Centre’s directive regarding LCs was in the backdrop of rising dues that discoms owe to gencos, which are not getting paid on time for the electricity supplied, despite standing long-term PPAs. As per the order, discoms will have to provide LCs equivalent to their monthly power-purchase bills.

Read: Power Ministry eases payment norms for Discoms

This will be a herculean task for many discoms, given their precarious financial positions, said CRISIL in its report.

“India Ratings, believes that the proposed payment security mechanism for power projects, is fraught with implementation challenges and the benefits of payment security mechanism are unlikely to accrue as already evident in the lax conformance to the creation of letter of credit under Solar Energy Corporation of India (SECI) PPAs. None of the India Ratings-rated project companies selling power under SECI PPA have received letters of credit for one month’s billing,” the agency noted.

Tough times for discoms

NTPC, which has 54 GW of operational power-generation capacity, has the largest share in overdue from various discoms. Adani Power, which operates 10 GW of generation assets in the country and supplies power to different states, has Rs 3,200 crore overdue from discoms.

Read : Discoms make a beeline for cheaper power supplied by NTPC under SCED system

State discoms on their part have been shuffling their feet when it came to making payments. For example, Uttar Pradesh, Karnataka, Tamil Nadu and Telangana, have delayed payments – equivalent to 3-5 months of the power-purchase cost – to the central and state gencos, noted CRISIL.

As per data available on the Government portal for “Payment Ratification and Analysis in Power Procurement for bringing in Transparency in Invoicing of generators” (PRAAPTI), the average monthly overdue of discoms towards these generators stood at Rs 21,200 crore.

In the absence of timely payments from discoms, gencos are facing a liquidity mismatch, leading to excessive dependence on borrowed funds and subsequent finance costs.