The Ministry of Power (MoP) has issued an advisory to regulators to lower electricity tariffs in case of advance payment by discoms for procuring power. The ministry has noted that in case of advance payment by discoms, there would be a reduced working capital requirement by gencos/transcos, which would reduce generation/transmission tariffs as well as retail tariffs. Earlier, the power ministry had mandated maintaining of adequate letter of credit (LC) as a payment security mechanism under PPAs by discoms. This was introduced to manage the mounting discom dues and is under implementation since August 1, 2019. In case of difficulty in opening of LC, the power ministry has allowed power procurement by discoms upon receiving advance payment/prepayment of an amount equal to at least a day’s purchase of electricity.
The MoP, vide an order dated June 28, 2019, had noted that despite provisions in the PPA that require discoms to open an LC in favour of developers, this is not followed in practice. For effective implementation of the LC mechanism, the MoP directed the National Load Despatch Centre as well as regional load despatch centres to despatch power only after receiving information by the generation company and the discom that an LC for the desired quantum of power has been opened. Although an LC can be opened as per the PPA, discoms are allowed to open the LC for a shorter duration also, say, for a week or a fortnight. The ministry issued a corrigendum on July 17, 2019 to the order, stating that in case discoms face difficulty in opening an LC, they may pay in advance the amount for at least one day’s purchase of electricity through electronic mode and inform the load dispatch centres about the same. Subsequently, the LDC would schedule power to the discoms.
In the recent advisory to regulators, the ministry has stated that in case of advance payment even for a day’s purchase of electricity by discoms to gencos and transcos, there may either be no requirement or a reduced requirement of working capital by gencos or transcos. Similarly, in case of prepayment by consumers, the discoms’ working capital required will be reduced. However, the present system of rebate on timely/advance payments does not fully compensate for the reduced requirement of working capital. Therefore, concerned commissions need to determine the reduction in generation/ transmission tariffs in case full or part payment is made by the discoms. Furthermore, the ministry has stated that retail tariffs for consumers should be reduced to the same extent and the norms for tariff determination may be revised. The ministry has directed regulatory commissions to develop an appropriate rebate mechanism for those discoms that opt for making advance payments. Such a rebate or a reduction in tariff can also be provided for the power purchased from competitively bid power generation projects if the procurer and the supplier agree to such a mechanism.
Apart from this, the ministry has sought the submission of an action taken report (ATR) to the Forum of Regulators on the progress and implementation of tariff reduction upon receiving advance payments by discoms.
Expected outcome
The implementation of the pre-payment mechanism would result in the reduction of carrying costs, and encourage the regulators to cut down tariffs. The advance payment mechanism holds the potential to lower retail tariffs as the benefits that accrue to discoms as well as generation and transmission companies would be passed on to end consumers.
Overall, the provision of LC or advance payment is a positive development for gencos. However, its implementation has been patchy so far and it does not address the issues pertaining to recovery of old receivables. Reportedly, only a few discoms in Karnataka and Madhya Pradesh have adopted the practice of opening LCs. Earlier, in October 2019, the Andhra Pradesh High Court issued a stay order on the central government’s proceedings against the state discoms for not providing LCs to power generators. Apart from this, in some states such as Maharashtra and Rajasthan, there is no provision in the PPAs regarding the opening of LCs.
Net, net, advance payments by discoms would ensure timely payment to gencos/transcos and provide them adequate revenues for meeting operational expenses. Furthermore, the reduction in generation/transmission tariffs via a suitable rebate mechanism and a subsequent reduction in retail tariffs would benefit end consumers. However, the LC mechanism as well as tariff adjustment for advance payment/prepayment needs to be implemented in true spirit to obtain the desired results. n
Priyanka Kwatra