The Government of India (GOI) has approved a relaxation for Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) that have been tasked with managing the liquidity crisis of the distribution companies.

The Ministry of Power announced receiving the cabinet approval for one-time approval to extend loans to the distribution companies (DISCOMs). Earlier, the loans were capped at 25% of the working capital of the previous year’s revenues of the DISCOMs under Ujwal DISCOM Assurance Yojana (UDAY). This relaxation is to provide liquidity to the power sector and ensure payments by the state governments to DISCOMs.

This move follows the announcement from the finance minister that power DISCOMs would receive loans up to ₹900 billion (~$12.03 billion) to help recover from the coronavirus crisis. The rider for these loans was that it would be given against state guarantees solely for clearing liabilities to power generating companies.

According to the Ministry of Power’s payment ratification and analysis portal (PRAAPTI), the DISCOMs owed renewable generators ₹101.11 billion (~$1.3 billion) in overdue payments (excluding dues under dispute) spread across 544 invoices at the end of June 2020. The outstanding dues to the renewable generators stood at ₹8.4 billion ($111.9 million).

The COVID-19 outbreak and the ensuing nationwide lockdown has aggravated the liquidity problems for the power sector.  Revenues of the power distribution companies have plummeted as people are unable to pay for the electricity consumed while power supplies, being an essential service, have been maintained. Yet, energy consumption has decreased substantially.

REC Limited recently reported that it had sanctioned over ₹300 billion (~$4 billion) to distribution companies in the country as of July 31, 2020. Similarly, PFC approved ₹306.07 billion (~$4.09 billion) as of July 31, 2020, as part of the liquidity package for DISCOMs.

PFC had noted earlier that the loans to DISCOMs are also subject to the implementation of reforms like the liquidation of dues and subsidies by the state government, installation of smart meters, improving operational and financial efficiency, among others. Lending would be through a long-term transitional loan with a maximum tenor of ten years.

The government’s statement further added that the power sector’s liquidity is not expected to improve in the short term, as economic activity and power demand will take some time to pick up.  So, there is an immediate need to infuse liquidity in the power sector for the continuation of power supply.

In a recent interview with Mercom, Smart Power India’s CEO, Jaideep Mukerji, said that power consumption in rural India plummeted by nearly 70% during the lockdown.

DISCOMs are the weakest link in India’s power sector, and the growing deployment of solar projects depends on the power purchasing ability of these DISCOMs. Mercom’s webinar on September 1, 2020, will discuss the pressing issues in the solar sector and the guest speakers from the Ministry of New and Renewable Energy (MNRE) and Solar Energy Corporation of India (SECI) will bring in the policy perspective and strategies to mitigate DISCOM risks.

You can register for the webinar here