One of the biggest barriers to India’s renewable energy sector is the poor financial performance of state-owned discoms. For almost a decade, discoms have struggled to make timely payments to gencos for the purchase of power. As a result, the generation companies are struggling to meet the financial requirements for operation and expansion. This has also dampened investor confidence in India’s renewable energy space.
The government has made many attempts to ease the financial burden of discoms, which has only increased with the Covid-19 pandemic. The discoms are carrying a huge backlog of outstanding and overdue payments, which have accrued high rates of late payment surcharge. To help ease the financial stress of discoms, the Ministry of Power (MoP) issued the Late Payment Surcharge Rules, 2021 in February 2021. Before the new rules were issued, the rate of late payment surcharge was 18 per cent annually. In August 2020, when the number of Covid-19 cases peaked in the country, the central government proposed that the late payment surcharge be kept below 12 per cent annually to improve the liquidity of discoms. During this time, some states such as Punjab, Karnataka and Bihar reduced their late payment surcharges. In October 2020, the MoP issued a proposal to reduce the rate of surcharge from 18 per cent to one that is more reflective of the current cost of borrowing. It added that the new rates must be linked to the State Bank of India’s (SBI) marginal cost of the funds-based lending rate.
Late Payment Surcharge Rules, 2021
The Late Payment Surcharge Rules, 2021, have lowered the late payment fee for discoms and power transmission licensees for projects in the country. The new rules will be applicable to projects for which tariffs have been determined through a competitive bidding process. As planned, the ministry has linked the late payment charges to the SBI lending rate. As per the document, for the first month of default, the charges will be equal to SBI’s marginal cost of the funds-based lending rate for one year as of April 1 of the given financial year, plus 5 per cent. As of April 1, 2020, the SBI base rate stands at 8.15 per cent annually. The late payments will be determined at an interest rate of 13.15 per cent. For every successive month of delay, the surcharge will be increased by 0.5 per cent.
If the dues are unpaid for seven months, the additional interest rate levied will not go beyond 3 per cent (total of 16.15 per cent). Rather, the discom will be debarred from procuring power from a power exchange or gaining short-term open access until the amount is paid. Further, if the rate of late payment surcharge as per the new rules is higher than the rate specified under the purchase or transmission agreement, the latter will be considered. The document adds that all payments by a discom to a generator or by a transmission system user to a transmission licensee must be first adjusted for late payment surcharge, starting from the longest overdue bill.
The move represents yet another effort by the government to reduce the financial burden of discoms. The current announcement implies a 4.85 per cent decrease from the previous late payment surcharge of 18 per cent. However, there are some issues in the new policy, particularly for discoms that purchase power from the renewable energy sector. With payments owed to renewable energy generators, the track record of discoms has been extremely poor. As of January 2021, the MoP reports that energy generators are owed about Rs 122.49 billion in overdue payments across 384 pending invoices. These represent payments that have been due for more than six months. Further, for renewable energy developers it might create more challenges as along with the delayed payments, they also lose out on the interest for the amount delayed.
The rules also incentivise discoms to make regular payments to avoid paying higher interest rates, but it is unclear whether they will clear their dues at all. Many have argued that these attempts to revive discoms may be to no avail and that the privatisation of these companies might be the only solution. Despite relief packages, discoms have not been able to minimise their average technical and commercial losses and they continue to rack up overdue payments. Time will tell whether the current announcement will be a wake-up call for discoms or yet another failed attempt at reviving them.
By Rithvik Kumar