DISCOMs’ Obligation to Pay for Power Within 45 Days of Raising Letter of Credit Remains

The Ministry of Power relaxed power payment requirements and late payment rates between March 24, 2020, and June 30, 2020, due to COVID-19 pandemic


The Ministry of Power (MoP) has issued a clarification regarding letters of credit (LoC) to be given by distribution companies (DISCOMs). It stated that DISCOMs are expected to deposit LoCs for 50% of the cost of power they want to be scheduled, while the remaining 50% will have to be paid within 45 days of the presentation of the bill or as specified in the power purchase agreement (PPA). If the payment is not made as specified, the late payment surcharge will apply.

On March 27, 2020, the Ministry issued a directive stating that the power may be scheduled even if the payment security mechanism (PSM) is reduced by 50% against the initial contract, and this would be valid until June 30, 2020.

“Due to this (COVID-19 pandemic), many consumers of the distribution companies (DISCOMs) are unable to pay their dues. This has critically affected the liquidity position of the DISCOMs, thereby impairing their ability to make timely payments of generating and transmission companies and maintaining a Letter of Credit,” stated the directive then.

This directive led to confusion and misinterpretation, and the Ministry received a series of queries responding to which it has issued the clarification.

DISCOMs from Andhra PradeshPunjabUttar Pradesh, and Madhya Pradesh, tried to take advantage of the confusion the order created and started invoking force majeure clause claiming they would not be able to pay for power for three months due to cash constraints caused by the COVID-19 pandemic.

It has clarified that if the payment is not made within the stipulated time, late charges, up to 18% per year, are applicable. However, it added that considering current circumstances, it has advised the Central Electricity Regulatory Commission (CERC) to reduce the rates for late payment surcharges for the period between March 24, 2020, and June 30, 2020. These charges will revert to the usual rates, starting July 1, 2020, the Ministry added. The CERC has now reduced the rate for late payment surcharge (LPS) payable by DISCOMs to power generators to 12% per annum from the earlier 18% if the due date falls between March 24, 2020, and June 30, 2020.

The letter by the Ministry also stated that the obligation to pay for the capacity charges as per the PPA would continue, as will the obligations to pay for the transmission charges. The Ministry added that efforts were being taken to infuse some liquidity in the power sector and that it would share more details shortly.

It permitted the DISCOMS also to raise funds voluntarily where required, to deal with the difficulties that arise from the Coronavirus outbreak. The MoP said that it was open to suggestions about this.

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 stressed that ‘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.

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.

Nithin Thomas 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.