LCs to induce discipline, but may stretch discom financials
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The Ministry of Power has directed all distribution companies (discoms) to open and maintain sufficient letters of credit (LC) as a payment-security mechanism under power purchase agreements (PPAs) signed with generation companies (gencos or generators). The order, dated June 28, 2019, is to be implemented from August.
The measure was taken in the wake of rising discom dues with private generators, which are not getting paid on time for the electricity supplied, despite long-term PPAs. Additionally, generators are required to procure coal from Coal India Ltd on a prepaid basis and make upfront payments to the railways for coal transportation. Thus, in the absence of timely payments from discoms, generators are facing a liquidity mismatch, leading to excessive dependence on borrowed funds and subsequent finance costs.
Highlights of the order
Discoms will have to mandatorily provide LCs to the generators against power procurement.
National and regional load-despatch centres (NLDC/RLDCs) will despatch power from a generator to discom, only when the generator intimates that an LC of required quantum was opened for the specified period.
The LDC will allow electricity wheeling up to the quantity equivalent to the value of LC, after which the supply will stop.
The respective genco can encash the LC only after the expiry of the grace period (45 to 60 days), as per PPA terms.
Even if discoms fail to maintain adequate LC and, hence, are not able to schedule power from their PPA sources, they will not be allowed by the NLDC or RLDCs to procure power from the short-term market.
Above all, if discoms fail to schedule the agreed quantity of power as per the PPA, they will be liable to pay compensation to generators as per the terms of the PPA.