Letter of credit system making discoms more disciplined, says Power Minister RK Singh

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Updated: September 19, 2019 2:31:47 AM

Delayed payments impair the generating companies’ ability to service debt and exhaust their working capital. This leads to lower credit ratings and higher interest rates.

Letter of credit system, discom, Power Minister, RK Singh, economy news, renewable energy, renewable energy projects, The minister said “one of the reasons of the legacy dues was rising outstanding from the government departments to discoms”.

The government is banking on the recently implemented letter of credit (LC) mechanism to compel state-owned electricity distribution companies (discoms) to become more disciplined and improve their revenue collection. Union power minister RK Singh told FE that since it is now mandatory for discoms to issue LCs in advance to receive power, “the system will ensure that the discoms are also encouraged to collect the dues (from customers) diligently”.

The power ministry has mandated discoms to open and maintain adequate LCs as payment security to power plants from August 1. “Most states managed to issue LCs. A few who could not issue these, too, managed to make advanced payments (to gencos),” Singh said.  However, the minister said since some of the power purchase agreements for renewable energy projects do not have the provision of LCs, the Union government cannot enforce this payment security measure for these projects.

Delayed payments impair the generating companies’ ability to service debt and exhaust their working capital. This leads to lower credit ratings and higher interest rates. Overdues — payment default of 60 days or more — from discoms to power producers were at Rs 55,091 crore at July end, according to the government’s Praapti portal. Out of this, Rs 19,819 crore, Rs 10,245 crore and Rs 5,874 crore were from Rajasthan, Tamil Nadu and Uttar Pradesh, respectively, comprising 65% of the total overdue. However, according to sources in the power generation sector, some discoms are taking no measures to clear previous backlogs after the introduction of the LC system.

Singh said the “LC mechanism has already stopped the creation of new dues” and the issue of legacy dues would be addressed by one of the provisions in the upcoming tariff policy which would make it compulsory for the discoms to pay the 18% delayed payment surcharge for pending dues.

The minister said “one of the reasons of the legacy dues was rising outstanding from the government departments to discoms”. Untimely payments from bulk consumers such as local civic bodies and state government departments, pegged at a whopping Rs 41,000 crore at May-end, have significantly impaired the discoms’ ability to turnaround. “Nobody went to disconnect power supply to the government offices,” Singh said, adding that “if we install the prepaid meter system, supply will be automatically be disconnected to defaulting consumers”.

Citing the example of Bihar where the prepaid metering system was recently implemented, the minister said that “this particular problem has largely been addressed”. The minister also said power demand falling 1.6% in August was not connected to the LC mechanism. “Extended monsoon this year led to lower agricultural consumption in August, which is responsible to power requirement coming down in the month from the corresponding period last year,” he said.

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