Power Generators Can Terminate PPA if DISCOM Defaults on Payment: Committee Proposal
The committee has given its recommendation to the government and other stakeholders to alleviate issues causing stress in the power sector
November 22, 2018
The Government of India constituted a High Level Empowered Committee (HLEC) on July 29, 2018 chaired by the Cabinet Secretary to address the issues of stressed thermal
power projects. Country’s apex bank, the Reserve Bank of India (RBI) was also invited to nominate a senior representative to the committee but it declined to join the deliberations.
The HLEC has prepared a report which contains the following:
- Number of stressed thermal power projects
- Causes of the stress in the sector
- Steps taken by the government to resolve stressed projects
- The committee’s recommendations to deal with these projects
According to the report, the Department of Financial Services has identified 34 stressed projects, amounting to a total capacity of 40,130 MW, out of which 24,405 MW of projects have been commissioned and 15,725 MW are under construction. Broadly, the reasons identified by the committee for the stress in these projects are as follows:
- Issues related to coal supply – since the cancellation of 204 coal mines by the Supreme Court of India in 2014, many of the power projects do not have access of adequate fuel supply.
- Slow growth in power demand – there has been a lower than anticipated growth in power demand. In addition, there is a large number of untied power purchase agreements, cases of termination of PPAs, low off-take and difficulties in selling costlier power are also causing stress on thermal power projects.
- Delayed payments by DISCOMs – the inability of DISCOMs to pay for power on time has caused a number of issues for developers when it comes to servicing debt and churning working capital.
- Inability of promoters to infuse equity – many projects have been delayed because promoters were often unable to infuse additional equity in the project. At times, promoters embarked on the project without sufficient financial capacity.
- Delayed implementation of the project – in many projects, there have been delays in development which have resulted into cost overruns.
- Issues related to banks and financial institutions (FIs) – these issues are mainly caused by delayed disbursement of capital by banks and FIs
- Aggressive bidding for projects by developers – a number of private sector developers have bid for projects at unsustainable tariffs leading to erosion in capital and inability of servicing debt.
- Regulatory and legal issues – due to the delay in approval of tariff petitions and approval of additional tariff under ‘Change in Law’ provision in PPA, projects are unable to recover cost of generation which adversely impacted financial viability. Other legal issues relating to bidding and allocation of coal mines have hampered implementation of projects.
- Project development related issues – many developers have faced problems acquiring land, connecting to transmission network or getting clearances from respective statutory bodies.
The HLEC led by P.K. Sinha (Cabinet Secretary), Ashwani Lohani (Chairman of Railway Board), Subhash Chandra Garg (Secretary of Department of Economic Affairs) and a number of other stakeholder representing various ministries and pubic sector as well as private banks recommended a number measures to alleviate the stressed power projects by addressing the causes. Following are the key recommendations:
- To tackle the issue of coal supply, the committee recommended that coal linkages may be allowed to be used against short term PPAs and power be sold through Discovery of Efficient Energy Price (DEEP) portal following a transparent bidding process. This would benefit the consumers by helping in enhancement of supply and reduction of prices. The other suggestion from the committee was that a generator should be able to terminate the PPA in case of DISCOM’s payment default and should have the facility to use coal linkages for short term PPAs up to two years or until they find another buyer under long or medium term PPA.
- The committee gave recommendations to facilitate sale of power of the stressed power plants by stating that timelines be laid down for retirement of old and inefficient capacity. Old and high heat rate plants that do not comply with the latest environmental norms should be considered for retirement in a phased and time bound manner at the same time avoiding any demand-supply mismatch.
- Recommendations with respect to delay in payments from DISCOMs was that public financial institutions (PFI), such as Rural Electrification Corporation (REC) and Power Finance Corporation (PFC), can discount the receivables from DISCOMs and make upfront payment to the generators. These financial institutions can realize their dues from the DISCOMs in due course of time and charge interest for the period of delay in payment by the DISCOM. The committee mentioned that this was a common practice in the business world and most of the banks provide this facility. In turn, this could help generators in realizing their dues on time. However, PFIs have expressed that due to poor financial health of some of the DISCOMs, there was a risk that they may not be able to recover the dues from the DISCOMs and, therefore, requested that the PFIs providing the bill discounting facility may also be covered by the tripartite agreement (TPA). In case of default by the DISCOM, the RBI may recover the dues from the account of states and make payment to the PFIs. In addition, the committee recommended that Ministry of Power can formulate the proposal for TPA coverage to PFC/REC for discounting bills of IPPs. Banks like SBI can also examine such discounting arrangements through existing FRAC mechanism (Fractional Reserve Banking/Lending Finance) for consideration of the competent authority.
- To combat the challenge of DISCOMs inability to pay on time, the committee recommended that LPS be mandatorily implemented in the event of delay in payment by the DISCOM.
- The HLEC recommended that DISCOMS, Coal India, Power Grid, Ministry of Environment and Forests, and appropriate Governments should be advised not to cancel PPAs, FSAs, transmission connectivity agreements, and all other approvals including water, even if the project is referred to the National Company Law Tribunal (NCLT) or is acquired by another entity subject. It also recommended that all clearances may be linked to the plant and not to the promoter.
- In case there is a delay in the commissioning of a project, the DISCOMs may be advised not to cancel the PPAs signed with the generator and the same be kept on hold for a certain period of time.
- In order to revive gas based power plants, Ministry of Power and Ministry of Petroleum & Natural Gas may jointly devise a scheme in line with the earlier e-bid (re-gasified liquid nitrogen gas RLNG) scheme.
As per the Ministry of Power, currently India has around 346 GW of installed power capacity. With over 10 percent of this capacity being considered to be under stress, the government has to make more efforts by adding remedial measures to uplift the power sector from its woes and boost investor confidence in India.
In March 2018, Mercom reported that the Indian Renewable Energy Development Agency (IREDA)’s gross non-performing assets (NPAs) rose to 6.01 percent of its total assets in the financial year (FY) 2016-17.
Shaurya is a staff reporter at MercomIndia.com with experience working in the Indian solar energy industry for the past four years in various roles. Prior to joining Mercom, Shaurya worked with a renewable energy developer and a consulting company. Shaurya holds a Bachelors Degree in Business Management from Lancaster University in the United Kingdom.