By AK Verma
COVID-19 has created a complex maze of power financing. Demand is down 28%, and consumption has fallen 25%. The downside may persist even after the lockdown as subdued economic activity would take around a year to regain. As an essential service power supply and maintenance continue but metre reading, billing and collection are disrupted. Discoms in India collect Rs 60,000 crore a month from consumers. Traditionally, outstanding dues, including subsidies, are realised in March. But high paying industrial and commercial consumers are more or less closed. Discoms have to give fixed charge waiver for the period of closure, which has implications. COVID-19 crisis might reduce immediate collections by about Rs 1 lakh crore. Beleaguered discoms with financial losses of Rs 27,000 crore in FY19 are likely to make much higher losses in FY20 and FY21. They would not be able to collect payments even for electricity which has been supplied and would face considerable difficulties to raise working capital. Borrowing limit—25% of previous year revenue—is exhausted. If the challenges are not addressed, resulting stress would soon permeate the entire value chain. Demand for long-term cheap finance from REC and PFC with 3-5 years moratorium will increase.
As of January 2020, discom-owned gencos owed Rs 76,000 crore as overdue payments, including disputed bills. Overdue payments create cash flow problems in the value chain, especially for lower capacity generators, as they need to pay in advance to Railways and coal companies. They operate at low plant load factor (PLF), eg, 57.61% in January 2020. With decreasing demand, higher fixed cost for idle capacity would become payable, resulting in further financial loss. Therefore, inefficient generators may have to shut. Gencos would defer the debt servicing payments per RBI guidelines. Ministry of coal has recently permitted a shift from Sight Letter of Credit to Usance Letter of Credit as a COVID-19 mitigation measure. This would reduce the cost of working capital for gencos. Quantities beyond the contracted ones without performance incentive can be lifted from CIL, which has unprecedentedly high stock. These measures should reduce the cost of power production. The benefits must be transferred to consumers as a demand booster.
PFC and REC face several challenges in raising cheap finances. First, they are not deposit-taking institutions, and thus, their cost of borrowing is high. Second, reduced capitalisation of PFC after REC takeover has resulted in a further increase in the cost of borrowing. Third, both PFC and REC would not get benefits of a moratorium of interest payments, as they are NBFCs. This will have an implication of Rs 15,000 crore each till June. They will have to raise Rs 25,000 crore each by June to meet the regular discharge of their liabilities. Markets have limited liquidity, and that increases the cost of borrowing. RBI has made Rs 1 Lakh crore available to banks through TLTRO. PFC & REC do not get the advantage of TLTRO. Thus, PFC and REC want funds from LIC and EPFO. They also insist on the conditionality of state guarantee with budget provision to service the debt for lending to state power utilities, as it reduces the risk weight and improves capital adequacy.
Corona pandemic is a force majeure situation. Transmission sector operates on a cost-plus basis, while coal and railways are risk-mitigated with advance payments.
Generators are secure through implementation of letter of credit mechanisms. Power distributors operate the riskiest business. If upstream stakeholders do not share the risks of distributors, the entire sector will become unsustainable. It is, thus, desirable to reduce fixed-cost burden on discoms. Railways can also think of usance LC mechanism. Return on equity of regulated entities should be revised downward, and depreciation can be deferred. Point of contact charges of transmission utilities should be reduced. Non-essential expenditure must be avoided.
Experts are advising the central government to borrow from RBI or borrow from the market beyond the stipulated limit with a commitment to return to fiscal rectitude. States should also be permitted to borrow to an enhanced limit. Ministry of power should immediately constitute a task-force to assess utility wise requirement of capital.
Author worked as Joint Secretary, Ministry of Power. Views are personal