September 2020

The renewable energy sector has seen phenomenal growth in the past decade and is considered a booming infrastructure sector. But, of late, it has been caught up in various structural issues, prime among them being the health of discoms.

Discom health directly impacts the credibility of renewable energy PPAs and the timely payment of dues, both of which have become the biggest risks for investors. This impact is visible in the changing investor perception of renewable energy prospects in India. Some large companies have already announced their plans to stay away from near-term auctions for wind and solar projects until these structural issues are resolved. In fact, SECI’s recent wind tender for 2.5 GW of capacity (with a 20 per cent solar power component) saw only two companies quoting admissible tariffs. The growing economic stress and infrastructural challenges pertaining to land and transmission constraints are adding to sector woes as financiers get more cautious.

Till date, the accumulated losses of discoms, along with regulatory assets, have reached Rs 1.65 trillion and the trade payables are over Rs 4 trillion. Several schemes have been launched to address this issue, but to no avail. Although the central government’s Rs 900 billion package under Atmanirbhar Bharat is in the right spirit, it is grossly inadequate to relieve the financial stress of these utilities. We have already seen the results of the bailout packages that were provided in 2001 and 2012. While the UDAY scheme witnessed a few shoots of success in the initial years, the discoms did not show significant signs of recovery.

Notably, only a handful of states account for the majority of the losses and the malaise in the sector. The major portion of dues to power generation companies is owed by discoms in Rajasthan, Uttar Pradesh, Jammu & Kashmir, Telangana, Andhra Pradesh, Karnataka and Tamil Nadu. However, most states will remain vulnerable unless the entire system is bolstered through fundamental level reforms.

To ensure that the ownership of reforms is taken by stakeholders, the states need to launch a massive communication campaign to connect and bring about a change in the attitude of stakeholders in the field. Any plan of action must go beyond specifying targets and must clearly outline the tasks and roles, the monitoring mechanism, and facilitation required at each level of operation. More importantly, the plan should be politically acceptable, if it has to become a successful reform.

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