DISCOMs Mandated to Maintain Letter of Credit as Payment Security Mechanism to Buy Power

In a bold move, RK Singh, Union Minister of State for Power and New & Renewable Energy has announced the approval of a proposal to make it mandatory for distribution licensees to open and maintain adequate Letter of Credit (LC) as payment security mechanism under power purchase agreements.

Power generators in India have battled the challenge of delayed or non-payments by distribution companies (DISCOMS) for decades. The delay in payments has largely been due to the operational mismanagement and stressed balance sheets of these DISCOMS. Due to this risk, many investors have completely stayed away from the Indian power sector. In May 2019, Mercom reported on payment delays becoming a problem for solar and wind project developers in India, especially in Andhra Pradesh, Tamil Nadu, and Telangana.

With the help of Regional Load Despatch Centres (RLDC) and National Load Despatch Centres (NLDC), the government is looking to tackle this problem head on to increase a level of comfort in the minds of project developers/generators.

Following are the highlights from the order issued by the central government:



  • PPAs have the provision to maintain an adequate payment security mechanism primarily in the form of LCs by the distribution licensees/procurers of power. A robust payment security system requires adequacy and validity of LC to cover the payments due on account of drawl of power.
  • It has been seen that despite the above provisions, the LCs are not issued and there are huge outstanding of unpaid power bills. This makes it difficult for the generators to pay for the fuel, which has to be paid in advance, to continue the generation. The generators are also required to pay to the railways in advance for the rakes. In these conditions, the generators would not be able to pay for fuel/transportation leading to a shortfall in the generation of electricity leading to widespread load shedding on account of lack of generation. NLDC and RLDC are, therefore, directed as follows:

The NLDC & RLDC will dispatch power only after it is informed by the generating company and/distribution companies that an LC for the desired quantum of power has been opened and copies made available to the concerned generating company. Also, the load despatch centers need to follow these steps: 

  1. The NLDC & RLDC will dispatch power only after it is informed by the generating company and /DISCOM that an LC for the desired quantum of power has been opened and copies made available to the concerned generating company
  2. The notification to NLDC and RLDC should specify the period of supply
  3. RLDC will dispatch electricity only up to the quantity equivalent of the value of LC
  4. The power dispatch would stop once the quantum of electricity under LC is supplied
  5. The concerned generating company is entitled to encash the LC after the expiry of the grace period, i.e., 45 to 60 days as provided in the power purchase agreement.
  6. In the event power is not dispatched for any reason given above, the distribution licensee will continue to pay the fixed charge to the generating company

The order also instructs load despatch centers to ensure that DISCOMS do not access short term open access or the power exchanges to procure power in this period. Further, in case scheduling and dispatch of power produced by any generator are not done due to non-opening of LC by the distribution licensee, then the distribution licensee would be liable to pay compensation to the generator as per the terms of power purchase agreements or power sale agreement.

The order is to come into effect from August 1, 2019.

This move is expected to be welcomed power generators. Currently, DISCOMs have around $6 billion in outstanding payments to generators. The order is expected to curtail the further piling up of delayed payments.

In February 2019, Ministry of Power established a committee to recommend solutions for payment delays by DISCOMs.