Empowering the Power Sector

The Indian power sector has shown phenomenal growth since independence and now the country has reached an almost negligible shortage of power, with surplus generating capacity. The marginal gap in demand and supply at the consumer end is not on account of unavailability of Generation Capacity, but due to technical and commercial reasons. Presently, we have around 370 GW installed capacity to cater to the present demand of about 167 GW. Even if we consider maximum demand of about 184 GW of the country till now, the generating capacity is more than double the demand. Since independence in 1947 (1.36 GW) we have increased our generation capacity more than 272 times.

We have created adequate transmission and distribution infrastructure to carry the power from generators to consumers. The Transmission & Distribution Network (including 400 Volts) has expanded more than 530 times since independence of the country. With more than 4 Lakh ckt. Km. of transmission lines we have adequate transmission system to carry power for a smooth transfer of power from one corner to another in the country. We have already achieved 100% electrification of households. The per capita consumption has increased more than 74 times from independence.

The power system comprises three major components viz. Generation, Transmission and Distribution. Generation capacity in the country comprises Central Sector (25 %), State Sector (28%) and Private Sector (47%) generating stations. Transmission is an important element in the power delivery value chain and facilitates evacuation of power from generating stations and its delivery to the load centres. In India, the Transmission system is mainly owned by Central Sector utilities. However, in the last few years, private companies have also entered in the development of the transmission system. State sector companies and State power departments own the distribution system. In some states like Delhi, Gujarat, West Bengal, Maharashtra etc. privately-owned companies also own distribution system. The government provides assistance to states with various central government schemes to improve the distribution sector.

Electricity is in the concurrent list in our Constitution. This means the Central Govt. as well as State Governments both are responsible for the development of the electricity sector. Central Govt. with the help of Central Power Sector Utilities (CPSUs) has created ample Generation and Transmission infrastructure. In our country, the power market is regulated by Central and State Regulatory Commissions. From traditional Govt. owned power utilities, we are moving towards privately owned entities in Generation, Transmissions, Distribution and trading.

Along with all the achievements of the power sector, several problems had also cropped up. The most challenging problem in the power sector is the financial stress of the distribution segment. This is reflected in very high Aggregate Technical and Commercial (AT&C) losses as well as in gap in Average Cost of Supply (ACS) and Average Rate of Realisation (ARR) mainly due to pilferage and uneconomic tariff for some categories of consumers. As a result, the financial position of the distribution companies in the country is severely strained and this is the cause of low investment in distribution. State DISCOMs in India is plagued by huge outstanding dues. This is primarily on account of faulty tariff schemes, high losses, and operational inefficiencies.[1] This problem affects the whole generation and supply chain as the Distribution Companies (DISCOMs) are not able to pay for generating and transmission companies due to their poor financial condition. It also desists private investors and financial institutions to invest in the power sector, which hinders the growth of the sector. Study of delayed payment issue is very important for understanding the present challenges and the steps required for sustainable growth of the Indian power sector.

As per the Central Electricity Regulatory Commission (CERC) Regulations, the payment is to be made within 45 days from the billing. In case the payment of any bill for charges payable under these Regulations is delayed by a beneficiary or long term customers, beyond a period of 45 days from the date of bills, a Late Payment Surcharge (LPS) are to be applied by the generating or the transmission utility, at the rate of 1.5 % per month. Though, there is a provision of rebate in Bills for payment within the specified period,[2] most of  DISCOMs are not able to make timely payment and getting rebate.

Highlighting the problems of delayed payments in the Indian power sector, in its report, the High-Level Empowered Committee (HLEC) under Cabinet Secretary, Govt. of India had mentioned that delay in realization of receivables from DISCOMs affects the ability of project developers to service debt in a timely manner and leads to exhaustion of working capital. Some DISCOMs have pressed for renegotiating terms of Power Purchase Agreements (PPAs). PPA disputes along with non-payment of Late Payment Surcharges (LPS) is the main reason for the financial stress of such projects.[3]

Recently, the Supreme Court had struck down the Reserve Bank of India (RBI) circular giving stressed power companies more time to find resolutions outside the bankruptcy court. This has started debates about the ideal for resolving the power sector issues. As per a report of Niti Ayog, despite the three financial reforms, the finances of DISCOMs remain precarious. Even Ujwal DISCOM Assurance Yojana (UDAY) has not been able to improve the situation, with DISCOMs unable to pay their power bills on time. The outstanding dues of Central Public Sector Undertakings(CPSUs) have been on the rise, except in 2017, where the dues declined because of UDAY.

Cash flow in the Indian Power Sector

The power supply chain works on the principle of a relay race in which the performance of each player in the game affects the performance of the sector. In the Indian power sector, the weakest player is Distribution Company due to its financial health issues. In the generation supply chain of the power sector, the cash flow originates from consumer and flows through Distribution Companies (DISCOMs) to Generating Companies (GENCOs) and Transmission Companies (TRANSCOs) and other service providers like Grid Operators.

Apart from payment from consumers the revenue also comes to DISCOMs as subsidy by State Govts. However, the main source of revenue for DISCOM is payment by consumers. For the financial viability of the power sector, the revenue stream of the DISCOM must be strong enough to sustain the whole power sector. However, in the present scenario, DISCOMs are not able to collect money from consumers and therefore, are not able to make payment of dues to GENCOs, TRANSCOs. This affects the cash flow in power sector badly and hampers the growth. Non or delayed payment by DISCOMs is one of the major cause of power sector stress.

Delayed payment by DISCOMs towards Generating Stations

The extent of the problem of delayed payment is evident from the fact that at the end of December 2019, the total overdue amount towards generators was Rs 1,05,868 Cr., whereas the outstanding amount was 12287 Cr. These figures are for payments overdue for more than 60 days. The total payments made by the DISCOMs in 12 months from Jan 2019 to December 2019 shows that the monthly amount paid by distribution utilities to the generating companies was lower than the amount billed for each month. During this period, the overdue amount increased by 77%.[4]

Out of the total overdue amount, across generating companies, the highest, 42 % overdue amount belongs to Private Sector Generating Companies followed by 31 % of Central Power Sector Enterprises (CPSEs) at the end of December 2019. This indicates that private power companies are facing more problems as compared to their counterparts from Central and State sector.

A high proportion of this overdue amount is attributable to only a few states. According to PRAAPTI portal, the top eight states in terms of the overdue amount at the end of December 2019 were Rajasthan (Rs 31458 Cr), Uttar Pradesh (Rs 14513 Cr), Tamil Nadu (Rs 13073 Cr), Maharashtra (11710 Cr.), Karnataka (Rs 6114 Cr), Telangana (Rs 5955 Cr), Andhra Pradesh (4219 Cr) and J&K (Rs 3809 Cr) contributing together more than 85 % of the overdue amount.

Reason for delayed payment by DISCOMs is mainly the perpetual gap between their revenue realization and expenditure. Normally all the DISCOMs are getting less money by selling electricity than their cost. In some cases, it may go up to around Rs.2.15  per unit of electricity[5].To meet this gap, DISCOMs either try to take loans or defer some expenditure including payments to the generating and transmission companies. The major factor contributing to this gap is non-revision of tariff or revised tariff not commensurate with the actual costs of supply.

The other major factor is the huge overdoes of DISCOMs from Government Departments/Local bodies for power supplied to them. Moreover, delay in getting the subsidy from the state government is also one of the important reasons for ACS-ARR gap. According to some reports, the subsidy of about Rs 6500 Cr and Rs 8000 Cr remained unpaid to DISCOMs during 2016-17 and 2017-18, respectively. Rural areas including supply to agriculture are a significant part of consumers of many DISCOMs. Getting revenue from these consumers is, generally, a challenge for DISCOMs in most of the States due to socio-political-economic compulsion of the Government. Thus, the fundamental problem of DISCOMs is lack of adequate cash inflow. DISCOMs either cannot raise appropriate bill or cannot collect revenue but they have to make committed expenditures like payment to generating companies and transmission licensees within 45 days.

Impact of delayed payment

As per regulatory and contractual norms, Generating Companies have to pay for Coal in 30 Days advance but they get money after more than 60/45 days of the sale of power. Practically, the delay is much beyond the stipulated period. The delayed or non-payment by DISCOMs leads to working capital crunch for generating companies.  This may affect the fuel supply as well as less generation and ultimately leads to poor financial performance.  Generating companies, particularly private ones, try to overcome the cash crunch by taking short-term loans at very high rates, further burdening the financials and cash limits. Cash strapped generating companies are not able to service debts leading to the creation of stressed assets in the power sector and Non Performing Assets in the financial sector.

Delayed payments by DISCOMs is causing severe financial strain on Solar/Wind generators. This is affecting adequate cash flows to pay their vendors, service their debt and even for meeting routine Operation &Maintenance expenses including salaries. In addition to the strain on domestic banking and financial sector, the power sector delayed payment can have an adverse impact on the country’s international image, due to substantial investment in the power sector from overseas investors. In case of continued financial stress in the power sector, global lenders may not come forward for future investments and this may adversely affect the growth of the sector.

The poor financial conditions of DISCOMs is causing a rise in contractual disputes also. Many DISCOMs are challenging the old Power Purchase Agreements (PPAs) by putting pressure on generating companies to reduce their cost of power. On 12 Feb 2018, RBI had issued a circular in which it was mandated that the lenders had to classify a loan account as stressed if there was even a day of default. As per the circular, if Banks failed to resolve the problem within 180 days of default they had to refer, the accounts having more than Rs 2,000 crore loan, to the National Company Law Tribunal (NCLT) or the bankruptcy court. Lenders had to file an application under the Insolvency and Bankruptcy Code 2016, within 15 days of the completion of the deadline of the 180 days. This had increased the problem of GENCOs and DISCOMs manifold. However, Hon’ble Supreme Court, vide its order dated April 2, 2019, had declared this circular ultra vires. Subsequently, the RBI, in June 2019 issued a revised circular for resolving stressed assets by offering lenders a 30-day period.

Remedial Measures

Since the problem of delayed payment in the Indian power sector in multidimensional, the approach for a solution must be multi-pronged. The first and foremost is improving the financial health of DISCOMs. This may be done by reducing Aggregate Technical & Commercial (AT&C) losses. Component wise losses need to be identified using energy auditing and accounting techniques. Each component of loss may have a different root cause and therefore, would need a different strategy.

Strengthening of Energy accounting infrastructure by 100% metering is the first step. Govt. of India has a target of replacing all the existing meters with smart meters with prepaid mode operation facility in by 2022. Once the prepaid metering installation is completed and disconnection of defaulting consumers is possible, the financial position will definitely improve, with increased revenue realization. Till all the meters are prepaid, the efficiency of Billing and Collection both needs to be improved by applying modern information technology and communication facilities. DISCOMs should focus on all three, Metering, Billing and Collection (MBC) processes for getting money in return of supply of power to consumers. Govt. of India through programs like APRDRP, DDUGJY, IPDS etc. has several steps to facilitate the strengthening of infrastructure to minimize losses of DISCOMs.

In 2001, tri-partite agreements were signed between RBI, State Governments and Central Power Sector Utilities for the securitization of dues of erstwhile SEBs. In 2015, UDAY scheme was launched to restructure the DISCOMs’ debt to make them financially stable and hold them accountable for their performance. 32 States/UTs have joined the scheme. However, the results of UDAY are not very encouraging; with actual AT&C loss figures crossing 40%, against 15% target.

From regulatory and policy side, measures like CERC Regulations for curtailment of supply due to non-payment of dues and the provision of payment security mechanisms like Letter of Credit / Escrow mechanism in the model PPAs as part of Standard Bidding Documents had been taken. However, these measures could yield only limited results until now. Most of the PPAs have a provision for third party sale/termination of PPA, in case of default by the procurer, but, generating companies are generally, not able to implement this provision due to non-availability of alternate buyers.

The other way to deal with the delayed payment problem is to facilitate DISCOMs in paying their dues timely. A discounting platform in similar lines of  Trade Receivable Discounting System (TReDS) created for Micro, Small and Medium Enterprises (MSMEs)[6] may be created. This would facilitate DISCOMs in paying bills timely, with payment of some interest to a financier to save them from defaulting. 

Periodic tariff revision, by State Electricity Regulatory Commissions (SERCs), needs to be ensured to make the tariff commensurate with the cost of supply. Appellate Tribunal for Electricity (APTEL), in November 2011 had directed SERCs to initiate suo-moto proceedings for tariff determination in accordance with Section 64 of the Electricity Act, 2003 in case of delay in filing of the tariff requirement by State utilities, one month beyond the scheduled date of submission of the petition. However, till date in many States, tariff determination is not taking place on a regular basis leading to ACS-ARR gap. Appropriate Legal Course of action must be taken against defaulting agencies in order to ensure streamlining the tariff revision process.

The practice of direct transfer of amount for payment of electricity bills of Govt. Departments’, from budget allocation of that department, may be followed to deal with the problem of huge overdue from Government Departments to the DISCOM.

COVID-19 Impact and Mitigating Measures by Govt. Agencies

Due to lockdown, the demand for power has been reduced up to 30% during Mar-May,2020. This resulted in undue pressure on DISCOMs, having long-term PPAs with Generators, as they have to pay fix charges even though not taking power. A reduced generation would adversely affect generators also. Drastic reduction in power demand is detrimental to the financial health of IPPs without long term PPAs, many of whom were already reeling under cash crunch.

Due to lockdown manual meter reading, bill generation and collection of payment were severely affected. Cash flow to DISCOMs had drastically reduced. Worsened financial conditions of consumers, especially industrial and commercial consumes has also affected revenue collection by DISCOMs.

A differentiated tariff structure with over-reliance on revenue from Commercial & Industrial consumers to offset the subsidy given to agricultural and residential customers has caused increased stress on DISCOMs.

As per media reports Discoms are likely to suffer a net revenue loss of around Rs 30,000 crore and liquidity crunch of about Rs 50,000 crore due to the coronavirus-induced nationwide lockdown. 

Even after lockdown is over, the economic slowdown will affect the power sector in the long run. Financial problems of DISCOMs would have a chain reaction affecting cash flow to Generators and Transmission Licensees due to non-payment by DISCOMs. Many state utilities have requested for surrendering shares waiver of fixed charges and financial help from financial institutions like REC, PFC. Under construction projects may be delayed due to non-availability of fund, equipment, manpower and mobility issues. This would not only cause inadequacy in power system but may also increase the cost of the projects, which ultimately have to be borne by consumers.

Govt. has taken several steps to deal with challenges. The Ministry of Power has issued various directions to State Govts. and other concerned agencies, recognizing the need for continuous generation of power, its transmissions and distribution. Various communications by Ministry of Power in March and April,20 had been made not to impose restrictions on production & movement of critical materials like coal, chemicals, gases etc. and intermediate or finished products to or from power plants to ensure the smooth operation of power plants.

Relief measures such as a moratorium on debt servicing over a 3-month period as notified by RBI and expected moderation in the interest rate may give comfort in the near term. However, RBI’s moratorium proposal would not be applicable to oversees lenders, which may affect several projects. Moderation of LC requirement by MoP and reduction in LPS rate by CERC & various SERCs are also efforts to ease the financial stress on utilities. Though most of the measure are related to deferment of dues instead of waiving off, it would provide some respite to cash strapped utilities for time being. To avoid delay in construction, Ministry of Power (MoP) has also written all States /UTs to allow the construction activities in Power Generation Projects and transmission and to allow movement of construction materials, equipment, spares & consumables etc., for these under-construction power projects.

Govt. had asked state-run power PSUs to defer some fixed charges and to offer a 20-25 % rebate to DISCOMs, on power sale and on inter-state transmission charges during the lockdown. As per media reports, NTPC would give Rs 1,363 crore discount to DISCOMs on fixed charges during the lockdown period and it would also defer the collection of Rs 2,064 crore fixed charges from DISCOMs. On 13th May 2020 Govt. announced a package for power sector under which, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) would provide up to Rs 90,000 Crore to DISCOMs for payment to generating and transmission companies. 

Conclusion

There is a serious problem of delayed payment by DISCOMs to GENCOs and other stakeholders. This is primarily due to very precarious financial conditions of most of the DISCOMs. Electricity is a concurrent subject, under the Constitution of India, the role of State Govts.  is very vital in dealing with this problem. The distribution and supply of power businesses need to be restructured. Such restructuring in the form of separation of carriage and content is proposed in the Electricity Act amendment.

As a step in this endeavour, recently, Govt. has announced that electricity distribution in union territories would be privatized. Robust mechanisms are to be adopted to ensure the rationalization of the tariff. Strict enforcement of Power Purchase Agreements (PPAs) must be ensured to establish the faith of investors and developers in the legal sanctity of contracts signed with DISCOMs. Investment in technical solutions and infrastructure upgrade is essential to make DISCOMs consumer and market-friendly. Steps like discounting, periodic tariff revisions, ensuring payment by Govt. Departments, subsidy payment etc. are required to be taken up on priority for empowering DISCOMs and strengthening the power sector.

Power sector must be run on commercial principles leaving the age-old perception of electricity supply as service. All the stakeholders including individual consumers, State Governments and political functionaries must accept the fact that in this world there is nothing like free lunch. The cost of electricity must be paid by the ultimate consumers to DISCOMs and in turn by DISCOMs to GENCOS, TRANSCOs and other service providers to sustain the power sector, which is the backbone of the economy of the country. 


[1] Legal Issues in India’s Energy Sector; Economic Law Practice 2018

[2] For payment of bills of the generating company and the transmission licensee within a period of 5 days of presentation of bills, a rebate of 1.50% shall be allowed. Where payments are made on any day after 5 days and within a period of 30 days of presentation of bills by the generating company or the transmission licensee, a rebate of 1% shall be allowed.

[3] https://powermin.nic.in/sites/default/files/webform/notices/20_Nov_R1_Draft_Report_HLEC_Final_20_Nov.pdf

[4] Source: PRAAPTI portal

[5] UDAY Portal

[6] Discounting of bills by Trade Receivables Discounting System or TReDS is an initiative undertaken by Reserve Bank of India to facilitate the conversion of trade receivables of MSMEs into liquid funds in a short period. The TReDS is governed by the regulatory framework put in place by RBI under the Payment and Settlement Systems Act 2007 (PSS Act). It is an electronic platform that allows the auctioning of trade receivable. The process is also commonly known as ‘bills discounting’ involves a financier (typically a bank) buying a bill (trade receivable) from a seller of goods before it’s due or before the buyer credits the value of the bill. The discount is the interest paid to the financier.

Kshitij Pandey from Dr. Ram Manohar Lohiya National Law University, Lucknow

EDITED BY: ROHAN ADITYA

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: