Andhra DISCOM Invokes Force Majeure Due to Cash Crunch During Coronavirus Pandemic

APSPDCL is the fourth state DISCOM to declare force majeure because of the COVID-19 outbreak

April 6, 2020


The Andhra Pradesh Southern Power Distribution Company Limited (APSPDCL) is the latest addition to the group of power distribution companies (DISCOMs) seeking refuge under the force majeure clause following the COVID-19 pandemic and the subsequent nationwide lockdown.

A ‘force majeure’ is declared in the event of unforeseeable circumstances that prevent parties from fulfilling a contract.

According to an official letter reviewed by Mercom, the APSPCDL stated the state’s DISCOMs are suffering from drastic reductions in revenue because of the three-week lockdown and the consequent disruption in economic activity. It said that this had affected a significant portion of consumers’ ability to pay their electricity bills.

It added that it is working towards overcoming this challenge by promoting online bill payment modes. However, the lockdown has affected their ability to supply retail power. This, in tandem with the current cash flow crunch throughout the economy, has constituted a force majeure event, the DISCOM claimed.

The DISCOM stated that this force majeure event had affected its ability to perform its obligations under its power purchase agreement (PPA), and therefore, no cause of action for breach of liability may arise from it. It added that it was unable to determine how long the force majeure will continue because of the uncertainty of present circumstances.

Although the government declared that electric power transmission is an essential service for securing smooth and uninterrupted power flow across and within the states, power distributors and generators across the country have been facing issues because of the nationwide lockdown. Recently, Mercom wrote about force majeure notices from DISCOMs in Punjab, Uttar Pradesh, and Madhya Pradesh.

“Distribution companies are writing vague and ambiguous letters without demonstrating as to how the performance capability of such distribution company will be impacted due to outbreak of COVID-19 and what steps they have undertaken to mitigate such risks,” said Aditya K Singh, Associate Partner at HSA Advocates.

“Almost all DISCOMs are placing heavy reliance on instructions issued by the Ministry of Power forgetting that the ministry itself has proposed to the Central Electricity Regulatory Commission (CERC) that the relief is made available only to the extent the same is permissible under the respective PPAs, and that too only restricted to late payment surcharge,” Singh noted.

The Ministry of Power earlier gave a directive that the central public sector undertaking (CPSU) generation and transmission companies would continue to supply electricity, even to DISCOMs, which have substantial outstanding dues to the generation companies. As per the announcement, in the current emergency, there will be no curtailment of supply to any DISCOM. The Ministry also directed the Central Electricity Regulatory Commission (CERC) to provide a moratorium of three months to DISCOMs to make payments to the generating companies and transmission licensees and not levy any penalties for late payments. The Ministry also requested the state governments to issue similar directions to state electricity regulatory commissions (SERCs).

Additionally, the MNRE has granted a ‘must-run’ status to renewable energy generating stations, which will remain unchanged throughout the lockdown period. It also said that since the DISCOMs have already been given sufficient relief and the electricity from renewable generating stations comprises only a minor portion of the total electricity generation in the country, the payments to these renewable generators should be made regularly.

“In my view, these notices have been issued contrary to the terms of the PPA and can be considered as a breach on the part of such distribution companies,” Singh concluded.

On March 24, 2020, the central government announced a complete lockdown of the country to arrest the spread of the virus. The government also declared that the spread of Coronavirus should be treated as a case of natural calamity, and a force majeure clause can be invoked.

“While governments around the world are announcing financial stimulus in billions to help their economies, this is a first, where government entities are invoking force majeure and trying to put the financial burden on power generators to continue producing power without payment for months. This is a recipe for disaster as private companies do not have the unlimited resources that the government has.”

Previously, the Ministry of New and Renewable Energy (MNRE) had also issued an official memorandum, which stated that the time extensions in scheduled commissioning of renewable projects due to the disruption of supply chains would be treated as a ‘force majeure’ event.

The Coronavirus pandemic is proving to be the solar industry’s biggest challenge this year, and the repercussions are being felt across industries all over the globe. Track the latest developments and initiatives taken by the government to fight the economic repercussions of the pandemic in the renewable industry here.