A recent analysis of global project development success by Fitch Solutions highlighted that India suffers from having the highest number of cancelled or suspended power projects. This translated into the ratings agency downward revising its capacity growth forecasts for the market. The firm noted, “We now expect India’s power consumption and generation to contract by 6.6 per cent and 6.8 per cent respectively, and for capacity to grow by only 2.7 per cent in 2020. Our initial forecasts accounted for a slight recovery in the first half of 2020 from the Covid-19 pandemic, but we no longer think this will take place, given near-to medium-term pressures on the sector from multiple fronts. Over the longer term, we expect India to add a net capacity of 262 GW between end 2019 and 2029. However, there are increasing downside risks to this view if structural issues in the sector remain unresolved.”
Here, the structural risks referred to by Fitch and, for that matter, several other industry experts, pertain mostly to the financial instability of the distribution segment. The significantly growing debt levels of discoms pose considerable risks to India’s power expansion plans. As of July 2020, it is estimated that discoms still owed about $17.6 billion to power producers, despite the government’s three-month debt moratorium and stimulus packages to support this subsector. A drop in power demand and depreciation of the Indian rupee will further weigh on revenue in the near term. These discoms now face a high financial liquidity risk, thus weakening the stability of the debt-ridden sector.
The renewable energy sector is not invulnerable to these risks. The Ministry of New and Renewable Energy informed the Lok Sabha in September 2020 that renewable energy projects with a total capacity of 16.8 GW have yet to sign power purchase agreements (PPAs) with discoms. As such, projects in the recently completed auctions face a major risk if they are unable to secure their PPAs. Similarly, there is a risk of delays in new project approvals, with a backlog of projects building up over the near term. In addition, with renewable power producers’ overdue receivables from discoms now at over Rs 100 billion, the situation is clearly becoming unsustainable.
On its part, the government has been attempting to relieve the financial issues in the sector. These efforts include a debt reduction programme, plans for an investment fund, tax waivers and provision of direct subsidies. However, none of these plans is confirmed at present. The government mandated state discoms to offer bank letters of credit in PPAs with effect from August 1, 2019, to ensure timely payments to power producers. In late September 2020, the Ministry of Power (MoP) also issued a framework to privatise discoms for the distribution and retail sale of electricity in a bid to improve efficiencies and reduce the high levels of debt. This will be done through the creation of a special purpose vehicle, with selected bidders acquiring equity stakes. The effectiveness of these efforts, however, will depend on how the government addresses various structural problems in the distribution segment and how implementation pans out.
Renewable Watch takes a closer look at the two key ongoing initiatives in the power distribution space – the liquidity infusion scheme for discoms under the Atmanirbhar Bharat Abhiyan and the privatisation of discoms.
In May 2020, the government announced a Rs 900 billion mega liquidity injection for discoms as part of the Rs 20 trillion stimulus package under the Atmanirbhar Bharat Abhiyan. This would be extended as loans by REC Limited and the Power Finance Corporation (PFC), and was aimed at clearing discoms’ liabilities to gencos. Funding under the liquidity infusion package would be done in two tranches of Rs 450 billion each. For the sanction and release of Tranche 1 funds, discoms would be required to provide an undertaking stating that they will enable digital payments of electricity bills and self-assessment of meters by consumers. Besides, state governments would provide an undertaking that the electricity dues owed by government departments would be paid to the discoms in three annual instalments. They would also undertake to install smart prepaid or prepaid meters in government departments/attached offices, and clear subsidy dues and put in place a system so that bills for subsidies are raised by discoms and paid upfront every quarter.
In order to avail of Tranche 2 funding, discoms would be required to submit details of the implementation of the undertakings given at the time of availing of Tranche 1 funds and a plan, endorsed by the state government, to bring down losses over the next three to four years. This will involve steps to reduce theft and tighten the ACS-ARR gap.
As of September 16, 2020, loans aggregating Rs 706 billion have been sanctioned and Rs 247 billion has been disbursed. Uttar Pradesh tops the charts for seeking the highest credit under the package at Rs 200 billion, followed by Telangana at Rs 120 billion and Karnataka at Rs 70 billion.
Recently, the Cabinet Committee on Economic Affairs approved a one-time relaxation in the working capital limit, enabling PFC and REC to extend loans to discoms above the working capital cap of 25 per cent of the past year’s revenues, under the Ujwal Discom Assurance Yojana (UDAY). With this relaxation in the working capital limit, state discoms will be able to secure more loans from PFC and REC to pay their power bills up to June 2020. The one-time relaxation will be valid for a year, and will help states that had hit the borrowing limit and were not able to avail of loans under UDAY. According to reports, Tamil Nadu is expected to be a key beneficiary of this move. Reportedly, TANGEDCO has sought a Rs 300 billion loan under the government’s liquidity package.
Meanwhile, the states are now requesting the central government to enhance the liquidity package for discoms from Rs 900 billion to Rs 1,250 billion to cover their losses up to June 2020. In another advisory issued by the power ministry, all gencos and transcos have been advised to charge a late payment surcharge (LPS) at a rate not exceeding 12 per cent per annum (simple interest) on all payments made under the liquidity infusion scheme. The current applicable rate of LPS is quite high despite the fact that interest rates in the country have softened over the past few years. In some cases, it goes up to 18 per cent per annum and has adversely impacted discoms.
Path to privatisation
While there has been a lot of support from the government in the form of liquidity measures such as the recent Rs 900 billion line of credit and schemes such as UDAY for discom turnaround in the past, the consensus is that until there is a higher level of efficiency through technology intervention or private participation, the financial losses will remain. These will continue to be a burden on the balance sheet of utilities and states and will, in turn, affect service quality for consumers.
The power sector is gearing up for a number of new changes, such as the integration of renewables, proliferation of microgrids and expansion of battery storage. These have made the task of managing the grid even more technical and complex. Moreover, this calls for discoms to be managed more professionally and in a much more technologically advanced way. Covid-19 has further underlined the need for the sector to adapt to technology.
One of the key announcements in this direction has been the privatisation of power distribution in the union territories (UTs), which would act as a model for distribution privatisation at the pan-Indian level.
PFC has appointed Deloitte and SBI Capital Markets (SBICAP) as consultants to help with the privatisation process. Deloitte will help privatise discoms in Puducherry, Chandigarh and the Andaman & Nicobar Islands, while SBICAP will assist in the privatisation of discoms in Dadra & Nagar Haveli, Daman & Diu, Jammu & Kashmir, and Ladakh.
UT discom privatisation could lead to the standardisation of processes as a standard bidding document (SBD) would be in place, which could then be adopted by state utilities in the future. The SBD is expected to be completed by end 2020. Several local and international companies are expected to participate in the bidding process. The prospective bidders include NTPC Limited, CESC Limited, Torrent Power, the Greenko Group, Tata Power, the Adani Group, Italy’s Enel Group, Malaysia’s Tenaga Nasional Bhd, Electricite de France SA, and Hong Kong’s CLP Group.
Many UTs comprise large cities such as Chandigarh, Puducherry, Daman & Diu and hence, successful implementation of the UT privatisation process would encourage state utilities to also tread this path. The process would, moreover, help define the role of the regulatory commissions and the transition support that the government would provide, the liabilities it would take and the kind of tariff subsidy support it would provide. However, some of the challenges that private investors envisage are uncertainty in the allowance of expenditure by regulators, treatment of capital expenditure, and, most importantly, the issue of regulatory assets. Other bottlenecks would be the accuracy of baseline data based on which discoms submit their bids, a realistic loss reduction trajectory and power purchase cost flexibility. The challenges for the government would be around the treatment of past liabilities. Further, employee resistance, lack of an appropriate policy framework and inadequate competition may pose obstructions.
For privatisation to be successful, a crucial aspect is risk perception, which, at present, is not very positive as is evident from recent bids. Going ahead, competition needs to increase and risk perception must improve for successful implementation of the privatisation plan.