Lending Support

ADB approves loan for MSEDCL’s HVDS programme

Maharashtra State Electricity Distribution Company Limited (MSEDCL) has recently secured financing for its $703.1 million high voltage distribution system (HVDS) project. On April 29, 2020, the Asian Development Bank (ADB) approved a $346 million loan to the electricity distribution company for the implementation of HVDS for new grid-connected rural agricultural customers across the state. Notably, the loan is ADB’s first results-based lending (RBL) programme in the South Asian energy sector. Under the RBL modality, fund disbursements depend on the achievement of the agreed programme results rather than on upfront expenditure, as is the case with traditional investment lending. The Maharashtra government and MSEDCL will arrange the remaining funding of $357.1 million required for the project. ADB’s loan will support the first phase of the state’s HVDS programme, which entails the installation of about 46,800 km of 11 kV grid extension lines and 132,600 customised low capacity distribution transformers; construction and upgrade of 121 33/11 kV distribution substations; and adequate metering. Around 156,000 farmers will be connected to the distribution network and metered with HVDS.

Background

MSEDCL supplies power to over 25.4 million customers in 457 towns and 42,000 villages across Maharashtra (except Mumbai, which is served by Adani Electricity and Tata Power). The utility’s consumer base includes over 4.2 million agricultural customers in rural areas, which account for about 30 per cent of its electricity sales. However, owing to deficiencies in the distribution network and low capex over the years, a large number of rural customers do not receive reliable electricity supply. The distribution infrastructure in rural areas is characterised by long, inefficient low voltage lines, with nearly 15-20 customers sharing a single large distribution transformer. Further, there is a mix of rural domestic and agricultural customers on the same feeder.

Poor metering and inadequate payments have resulted in aggregate technical and commercial losses of over 20 per cent. Also, the discom charges most agricultural customers at a fixed tariff based on the declared capacity of the agricultural pump rather than on actual electricity consumption, which leads to wasteful electricity and water consumption. Further, agricultural tariffs are highly subsidised. The state government’s subsidy bill for agricultural customers stood at $0.8 billion in financial year 2018. These factors have a negative impact on MSEDCL’s financial performance. In order to address these issues, the Maharashtra government decided to provide a connection through HVDS or off-grid solar water pumps to applicants for agricultural electricity connections. The project will be implemented by 2021 and may be continued beyond that. In ADB’s official release, Len George, senior energy specialist, says, “Providing efficient, reliable and good quality power to rural agricultural customers in Maharashtra will improve agricultural productivity and efficiency in the electricity value chain. Wider adoption of HVDS with metering and usage-based tariffs sets the stage for investments in energy efficient pumps and drip irrigation, and could support improvements in subsidy management.”

Financing details

The RBL will support Maharashtra’s HVDS programme for new grid-connected rural agricultural customers from April 2020 to December 2021. The total financing requirement of the project is estimated at $703.1 million, of which ADB will provide a loan of $346.0 million. The loan will have a 20-year term, including a grace period of five years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (Libor)-based lending facility; and a commitment charge of 0.15 per cent per year. Based on the straight-line method, the average maturity is 12.75 years, and there is no maturity premium payable to ADB. Further, the loan will be accompanied by a $1 million technical assistance from ADB to demonstrate energy and water conservation efforts. The Energy Department, Maharashtra, and MSEDCL are the executing agencies for the programme.

In sum, ADB’s financial support to MSEDCL is expected to help the utility provide reliable electricity supply to rural agricultural consumers and cut down its operational losses, leading to a viable distribution network in the long run.

Neha Bhatnagar

 

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