Unsettled Accounts

Renewable industry in distress due to non-payment of dues by discoms

By Khushboo Goyal

Even as the renewable energy sector is striving to achieve greater capacity at low tariffs, the discoms responsible for buying the majority of this power are struggling to stay afloat. The Ujwal Discom Assurance Yojana (UDAY) was launched in 2015 to improve the financial health of discoms through a series of measures aimed at the reduction of aggregate technical and commercial (AT&C) losses. These include the installation of smart meters and a hike in power tariffs.

Under UDAY, discoms that achieved the set targets within the deadlines were to be bailed out through state government support. However, UDAY has not been able to generate the desired results, as AT&C losses, on account of inaccurate billing and collection, and power thefts remain high. In addition, the tariff hikes have been negligible for most discoms owing to political reasons. Thus, the discoms continue to report huge losses and have not been able to pay the power producers.

In fact, as of July 2019, the discoms were due to pay almost Rs 82 billion to renewable energy generators, as per the Central Electricity Authority (CEA). This figure would have been a staggering Rs 100 billion if Greenko’s dues of Rs 17 billion were also included. However, the information regarding the outstanding payment to Greenko was withdrawn by the company. All major renewable energy developers are suffering due to payment defaults by discoms. The list of unpaid power producers includes ReNew Power, Tata Power, Azure Power, PTC Energy, Adani Power, CLP India, Shapoorji Pallonji and Sprng Energy. The payment due to thermal power producers is even higher, and even central entities like NTPC Limited have not been paid by discoms.

The delay in payments is not a one-time default, but has become a recurring problem due to the poor financial health of discoms. In fact, some of these discoms have not paid the power producers for as long as six months to one year. With restrictions on open access imposed by discoms, long-term power purchase agreements (PPAs) with discoms are the only option for the majority of the developers. Renewable power producers are already struggling with low margins due to declining tariffs, transmission and land constraints, and generation curtailment. These payment delays severely affect the developers that have to repay investors and banks, and non-payment could put the entire project at risk. Further, developers might have to halt operations resulting in non-performing assets.

As per the CEA data, as many as 472 renewable power projects with a total capacity of 22.46 GW have not received payments due to them. Notably, renewable energy-rich states Andhra Pradesh and Tamil Nadu are the worst performers with almost Rs 40 billion of total payment due to developers. This has created a lot of discontentment among developers and investors, as seen in the lukewarm response to recent bids. For instance, the Solar Energy Corporation of India’s (SECI) tender for 1.2 GW of solar power received very few bids and finally 480 MW was allocated to two developers in August 2019. Further, the size of another tender issued by SECI in August 2019 for 1.8 GW of wind capacity was reduced to 440 MW, due to a poor response from bidders. The wind tender received interest from only two bidders, both international utilities, which highlights the lack of confidence among domestic players.

Government intervention

To address the issue of delayed payments by discoms, the Ministry of Power appointed a high-level committee in February 2019 to recommend reforms in PPAs and address the problem of payment defaults by discoms. The government also issued directives in June 2019 to safeguard developers from payment delays. A payment security mechanism has been approved, under which discoms are required to open and maintain adequate letters of credit (LCs) according to their PPAs from August 1, 2019. Further, the National Load Despatch Centre (NLDC) and regional load despatch centres (RLDCs) have been directed not to schedule power to the defaulting discoms.

As per the provisions, the NLDC and RLDCs can schedule power to a discom only after the latter issues a written intimation that LCs for the required quantum of power have been opened, and the generating company confirms the same. If a discom has trouble opening its LC, then it can make advance electronic payment to the generator for at least one day’s power. Only the quantity of power specified in the LC will be supplied to the discom and the developer can encash the LC after expiry of the grace period for payment of dues, that is, 45-60 days. Discoms that default on payments will not be allowed to procure power through power exchanges or short-term open access. However, state generating companies are excluded from these directives. While the order met with some resistance at first, it has been swiftly put into motion with Uttar Pradesh Power Corporation Limited already banned by the Power System Operation Corporation from purchasing any electricity from the power exchanges due to alleged lapses in granting payment security to generators. Reportedly, many state discoms have started releasing LCs for large amounts to power generators to procure power.

That said, some discoms did not release LCs and instead curtailed renewable power and kept procuring power from state generating companies. In light of this, another order was released in July 2019 to safeguard renewable power developers. As per the order, if power despatch to discoms is discontinued due to non-payment of dues to the generator, the fixed charges will continue to accrue during the non-despatch period as in the case of thermal power. Fixed charges for renewables reflect the cost of installation, and operations and maintenance of the power plant, that is the power tariffs as per PPAs. This additional provision will provide payment security to private developers.

The way forward

While the said government provisions are a step in the right direction and will certainly boost the morale of the entire developer community, they do not address the root cause of the problem. In fact, it is a possibility that discoms that are unable to pay both their dues and LCs to generators might opt for load shedding to cut their operational costs and keep afloat, affecting end consumers. Alternatively, the discoms might have to borrow more money from banks to meet their LC requirements. Thus, the new directives, while empowering the developers, may actually weaken the discoms, which are already saddled with debt. To prevent this, policymakers need to address the inherent issues facing the discoms.

First and foremost, the entire power sector needs to be made free from political interference, so that tariffs can continue to increase as per the actual cost of power generation and supply. Further, the discoms’ metering and billing inefficiencies need to be tackled immediately, with strict penalties imposed on power thefts. Discoms have to be open to the idea of decentralised solar power generation so that distribution and transmission losses can be minimised through local generation and consumption of solar power. In addition, privatisation of the distribution segment can be explored to improve the financial health of discoms. This will promote competition and can have dual benefits as consumers can get reliable and uninterrupted power while discoms can reduce their debts.

Summing up, for the continued growth of India’s renewable energy capacity, the financial health of discoms has to improve so that they are able to pay the stressed power producers.

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