The electricity distribution companies (discoms) of West Bengal and Gujarat are those that can be trusted to pay their dues to electricity suppliers on time, a research report of think-tank Climate Policy Initiative (CPI) has said.

The CPI, a network of over 70 experts and analysts, works to improve energy and land use practices across the world. It is, for instance, the programme manager for US-India Clean Energy Finance.

The CPI study went into the ‘offtaker risk’ for renewable energy projects, or the risk of the company that puts up a wind or solar project not paying back its loans to banks because the offtaker — the discom — did not pay its dues. The idea was to come up with a ‘payment security mechanism’ (PSM), which is basically a fund that will pay the discom’s dues if it fails to do so. This would enhance the credit rating of the discom, and in turn lower interest rates for projects from which the discoms would buy electricity.

Key findings

The off-taker risk, the study says, adds as much as 1.07 per cent to the cost of debt for renewable energy projects.

The authors of the report (Vinit Atal, Gireesh Shrimali and Vaibhav Pratap Singh) note that not all discoms are the same. The West Bengal discom “does not require any PSM to achieve ‘BB rating’ (which indicates current capacity to meet debt obligations)”. The Gujarat discom “requires minimal support (one month or less) to enhance credit quality of its projects.” (This means, a fund that would be created as a PSM mechanism needs to have in it only one month’s dues of the discom.)

On the other hand, some discoms “require impractically high payment support”, the authors say, naming the Uttarakhand discom as an example. This discom would require “unusually high payment support of more than 45 months”. However, the authors also note that while this could point towards an “unusually bad discom”, it could also be due to lack of data in sufficient detail.

Most other discoms require “moderately high payment support, of 12 months’ payment” to achieve BB rating. Other than outliers such as West Bengal and Gujarat on the one hand and Uttarakhand on the other, most discoms would require 8-17 months’ payment for them to achieve BB rating.

(A BBB rating would be better, but the authors says ‘BB’ is “the theoretical maximum credit enhancement that can be achieved through the use of a PSM” because further credit enhancement would require the mitigation of other risk factors too.)