Demonetization has been chaotic and changing the way the Indian economy functions. For the power sector, demonetization has turned out to be a positive event with distribution companies (DISCOMs) recovering pending power bills from their customers and banks suddenly flush with funds, all of which could relax lending to the power sector and potentially bring down interest rates.
The government has mandated that the old notes of Rs.500 and Rs.1000 denominations can be used by the citizens to pay pending utility bills which will help DISCOMs due to their huge backlog of unpaid bills. DISCOMs are expecting a substantial influx of payments prior to the December 31 deadline after which these currency notes will become invalid. For cash-strapped DISCOMs this is unexpected good news.
An official at Maharashtra State Electricity Distribution Company Limited (MSEDCL) stated, “since the announcement of demonetization, DISCOMs in the state have seen payments of old bills cross Rs. 1 billion ($14.74 million) within a week. The signs are positive as this will financially empower the DISCOMs.”
Due to the amnesty of taxes and penalties provided to black money holders (unaccounted currency), the government will have a huge influx of money that can be allocated for infrastructural development and funding new projects, stated an official at Transmission Corporation of Telangana Limited (TCTL).
An official at the Ministry of New and Renewable Energy (MNRE) said, “India is largely a cash economy so in the short-term demonetization is going to hurt installations as small developers will find it tough to pay for land acquisition, but, in the long-term it will be beneficial as DISCOMs will get paid, lending rates will fall and foreign investment will increase in the face of a falling rupee and rising dollar.”
There are many ambitious projects like the Green Energy Transmission Corridor that require large investments. With consumers repaying pending bills and government taxing defaulters, nodal agencies foresee better fund allotment from the government in the future, commented an official at Bihar State Power Holding Company Limited (BSPHCL).
Officials at Jharkhand Renewable Energy Development Agency (JREDA), Odisha Power Transmission Corporation Limited (OPTCL) and Power Management Company, Madhya Pradesh, all concurred: due to demonetization, peace is being restored in regions like Jammu & Kashmir, and Jharkhand, Madhya Pradesh, Odisha, Andhra Pradesh [insurgency belt] as insurgents find it hard to fund their operations. This will uplift the morale of developers in these regions and installations will pick up.
Tamil Nadu Generation and Distribution Corporation (TANGEDCO) received tepid response for its 500 MW tender due to demonetization, but it was an exception said an official at MNRE.
An official at Uttar Pradesh Power Transmission Corporation (UPPTCL) stated that the state has been a classic example for unpaid electricity bills. Now the DISCOMs can get some relief with consumers using their stashed cash to pay pending bills as well as advance payment for future month’s electricity bills in some cases.
A slew of government funded projects and subsidies are expected as cash deposits increase in banks, an official at the Rajasthan Renewable Energy Corporation commented.
The lending community is cautious and feels that it is too early to predict if all this money that is flowing into the banks right now is here to stay. There is a possibility that the funds deposited could be withdrawn after December 2016. But, on the flip side they are also aware of the fact that they cannot have a situation where the deposits and cash balances are much higher than lending, leading to “negative carry” (a situation in which the income earned from a loan is less than the bank’s cost of deposits).
Developers whom we spoke to and who have won bids recently are concerned about payments to construction workers, on-time work completion and the availability of cash to take care of such expenses. However, they are also hoping to see reduction in lending rates that would help bring down the project cost and in turn boost their project IRRs.
“Demonetization, though chaotic, is turning out to be an overall positive event for the renewable sector in the long run. This combined with the rapid decline in solar component costs is making a lot of low questionable bids feasible. However, we have to wait and see how government agencies handle the situation – especially payment issues – going forward,” commented Raj Prabhu, CEO of Mercom Capital Group.
Raj is a recognized thought leader in clean energy markets where his work has influenced policies worldwide. He has a deep understanding of regulatory policy and clean energy markets and his market and opinion pieces are regularly published on both MercomIndia.com and other leading publications globally. Raj is also a regular speaker and presenter on clean energy policy and finance topics at conferences worldwide. Raj attended the KLE College of Science in Bangalore, India for physics and chemistry, and holds a Bachelor of Science Degree in Hotel and Institutional Management from Johnson and Wales University, Rhode Island. More articles from Raj Prabhu.