To reduce the financial burden of distribution companies (DISCOMs), the Ministry of Power (MoP) proposed a reduction in late payment surcharges (LPS) for payment delays to the power generators last month. This is a big blow to power generators who were already experiencing late payments and now have to lose out on the interest for the amount delayed.
In a recent notification, the Ministry said it found the rates of late payment surcharges too high and not in line with the current borrowing cost. Since rates of interest have fallen over time, there was a need to reduce LPS, it said.
The ministry has proposed for the surcharge to start at 50 basis points over the prevailing marginal cost of funds-based lending rate (MCLR) after the first one-month delay. This is subject to a maximum of the applicable bank rate plus 200 basis points. The rate cannot be higher than the rate provided in the agreement to purchase or transmit power.
The last date to submit stakeholder comments and suggestions was October 29th, and the rules are expected to come into force as soon as it is published in the official gazette.
If the proposed changes are implemented, the LPS rate will range between 7.15% and 8.65% per year, considering an MCLR of 6.65%. Currently, LPS rates go as high as 18% in several cases. The ministry has previously said that DISCOMs have been severely affected by these high rates in the past. It explained that lowering the rate of LPS would reduce the financial burden on DISCOMs.
DISCOMs have weighed down the renewable sector due to their poor financial performance and inability to pay their dues on time. Generators are forced to file petitions with state electricity regulatory commissions, which drag on for extended periods. Despite this, they still do not receive their dues on time.
According to recent data from the Ministry of Power, DISCOMs owed over ₹106.7 billion (~$1.43 billion) to renewable energy generators (excluding disputed amounts) in overdue payments across 460 pending invoices.
While the Ministry hopes to reduce the financial burden on DISCOMs with this move, there is no guarantee that this will make them pay their dues on time. There have been several cases where generators offered to lower the rate of interest on late payment surcharges to as low as 6%, but DISCOMs still did not clear their dues.
Mercom spoke to stakeholders in the industry to get their opinion on this. An executive from an independent power producer (IPP) company explained that the move to reduce LPS is more of a long-term solution.
“The central government has been taking a lot of steps to help DISCOMS pay their dues on time. Their incentives include the present order to reduce LPS and the letter of credit order through which they hope to fix these issues in the long run. The intent behind this move was good, and the Ministry is trying to ensure that generators get paid on time, the executive said.
“If generators get paid on time, the capacity addition programs, the employment generation, among others, would start to fall in line,” he added.
Stakeholders Mercom spoke to added that there was some ambiguity regarding the applicability of the proposed changes, which needs to be cleared so that the industry can plan their projects accordingly.
Subrahmanyam Pulipaka, Chief Executive Officer for the National Solar Energy Federation of India (NSEFI), explained that these rules must apply only to those power purchase agreements (PPA) whose bid submission dates fall after the date of publication of these rules. If these rules are implemented, they would affect the terms of the PPA and cause imbalance.
“It is not immediately clear if this applies to all existing PPAs or just the new ones. If it applies to the existing ones also, then what happens to the terms and conditions defined under the existing PPA?” the executive from the IPP said, adding “there is a loss of at least 600 basis points which generators should not be forced to suffer. We are already struggling with delayed payments.”
Several states have also reduced the rate of LPS amid the COVID-19 crisis. States like Bihar, Punjab, Karnataka, Chhattisgarh, West Bengal, Madhya Pradesh, and all union territories set lower rates during the global pandemic’s initial stages. The Central Electricity Regulatory Commission (CERC) had also specified a lower LPS for bills due between March 24, 2020, and June 30, 2020.
DISCOMs have received extensive support from the central and respective state governments over the years. In May, the central government announced that DISCOMs would receive ₹900 billion (~$12.03 billion) as part of India’s stimulus package to help the Indian economy recover from the coronavirus crisis. The Power Finance Corporation Limited had approved ₹306.07 billion (~$4.09 billion) of these funds on July 31, 2020.
Despite these efforts, they have remained a significant strain on the Indian power system, and particularly the renewable energy sector, where generators and power producers have been waiting for their dues for a long time.
Mercom has previously written about how bailing out power discoms at every crisis is not the way to fix them.
Generators have called for DISCOMs to be privatized to augment their ability to collect revenues, reduce debt, and increase earnings with experienced management.
Image credit: Unsplash
Nithin is a staff reporter at Mercom India. Previously with Reuters News, he has covered oil, metals and agricultural commodity markets across global markets. He has also covered refinery and pipeline explosions, oil and gas leaks, Atlantic region hurricane developments, and other natural disasters. Nithin holds a Masters Degree in Applied Economics from Christ University, Bangalore and a Bachelor’s Degree in Commerce from Loyola College, Chennai. More articles from Nithin.