Finally, the government has cracked the whip on non-submission of Letter of Credit (LoC) by discoms. Two issues forced the government’s hand. First there were huge unpaid power bills by discoms to the tune of Rs 30,522 crore at end of June 2019. Second, this non-paying behavior produces cascading financial stress for gencos which have to pre-pay for fuel and transportation. Particularly hard-hit were the private gencos who were not getting paid by the discoms despite long-term PPAs. Now all this is changing.
In a series of orders and clarifications government has mandated that discoms should provide LoCs as payment security from August 1, 2019. Provisions related to LoC to cover the payments on account of drawal of power were there under the Electricity Act 2003, but LoCs were not been given by the discoms. Hence, the government has notified orders for strict implementation.
The National, Regional and State Load Despatch Centres have been directed to dispatch power only after they are told by the Genco and the discoms that an LoC for the desired quantum of power has been opened. The dispatch shall stop once the quantum of electricity under the LoC has been supplied. Gencos will still be paid fixed costs – a key component of the tariff, apart from variable generation costs – but discoms will not even be able to access power exchanges and buy through short term open access.
Simply put, the discoms were not offering LoCs as contracted in PPAs and even as their unpaid bills were accumulating they met their requirements by buying from short-term markets. This is not possible anymore now. MNRE has also secured the interests of solar, wind and small hydro producers by mandating that defaulting discoms pay fixed charges to renewable power producers.
The latest slew of orders was necessary, otherwise all the gains of UDAY, the mammoth 4.3 lakh crore debt recast scheme initiated during Modi 1.0 government will go in vain. Decades of bad practices must end. The distribution sector has also to take up the difficult roadmaps of tariff reform and the issue of regulatory assets. The beginning has to be made by paying gencos on time for what they draw and not create mounting outstandings.
