Electricity distribution companies (discoms) could potentially save a quarter of their additional payouts, and effectively pay ~Rs 20,000 crore to generation companies (gencos) this fiscal — in addition to their annual cost of power purchase — if they subscribe to the Ministry of Power’s new scheme.

Under this, overdues, including past late payment surcharge (LPS; as on the cut-off date of June 3, 2022) will be converted into equated monthly instalments (EMIs) that discoms have to pay over 12-48 months, based on different slabs (refer to annexure).

If discoms clear the fresh dues and EMIs on time, going forward, they won’t be billed for LPS by gencos.

Success of the scheme will depend on two factors: how discoms are able to enhance their revenues, and an enforcement mechanism that ensures timely payment to gencos.

In fiscal 2021, the central government unveiled the Aatmanirbhar Bharat package worth Rs 1.35 lakh crore to clear discom dues. However, its impact was short-lived and most discoms continue to face liquidity challenges following operating losses¹, and their dues remain high at ~Rs 1.2 lakh crore² as on May 31, 2022.

The scheme aims to provide immediate liquidity to gencos. That’s because, along with commencement of payments, the receivables can also be discounted by banks based on the assurance of timely payment of EMIs. This would help free up working capital limits for gencos to buy coal, the prices of which have soared because of geopolitical tensions.

Says Manish Gupta, Senior Director, Crisil Ratings, “With savings of ~25% (Rs. 6,500 – 7,500 crore), the net payout of discoms to gencos is likely to be ~Rs 20,000 crore this fiscal³, over and above their yearly cost of power purchase. Funding this additional payout through internal accruals could be a challenge as discoms continue to incur operating losses. But an immediate, one-time additional recovery through tariff or government assistance to at least cover the incremental payouts could help discoms clear their dues this fiscal.”

Since this scheme is for up to four years, improving operating efficiency through reduction in aggregate technical and commercial (AT&C) losses could support payouts over the medium term. The Revamped Distribution Sector Scheme launched by the government in July 2021 also aims to narrow the gap between average cost of supply and average revenue realised (ACS-ARR) to zero and reduce AT&C losses to 12-15% by fiscal 2025, which will further support improvement in efficiency.

While the scheme mentions that discoms must maintain an unconditional, irrevocable and adequate payment security mechanism, it requires a strong enforcement mechanism to deter non-compliance.

In the past, the central government had taken multiple steps to ensure payment security such as mandating discoms to provide unconditional letter of credit to gencos and ensuring state government guarantees and access to state funds parked with the Reserve Bank of India for loans sanctioned by Power Finance Corporation Ltd and REC Ltd under Aatmanirbhar Bharat package in 2020. However, the attributes of the payment security mechanism under this new scheme is yet to be announced.

This scheme is a potential boon for the ailing power sector since it affords discoms time to improve their operating efficiency and, in turn, their financial position, while simultaneously improving the liquidity of gencos. That said, further developments on the scheme and the enforcement mechanism remain the monitorable.

¹ The average cost of power (ACS) procured by the discoms is greater than the average revenue realised (ARR).
² Source: PRAAPTI, Ministry of Power
³ This assessment considers cut-off outstanding dues of ~Rs 1.2 lakh crore as on May 31, 2022, and nine months of payment during the current fiscal starting July 2022.