Experts, however, feel that the move is not without challenges, particularly challenges in securing LCs for large sums by the discoms.

Kolkata: The Union Power Ministry’s recent directive on the payment security mechanism, once implemented, is expected to result in an improved payment pattern from the discoms and would therefore certainly be positive for power generation companies. Experts, however, feel that the move is not without challenges, particularly challenges in securing LCs for large sums by the discoms.

Interestingly, the ministry of power has recently issued directions to the National Load Dispatch Centre (NLDC) and Regional Load Dispatch Centres (RLDC) to schedule and dispatch power from generation companies to distribution utilities (discoms) only after implementation of payment security mechanism. This should be in the form of letter of credit (LC) by the discoms to the generation companies for the scheduled quantum of power, with effect from August 1, 2019. This was necessitated by the continued delays in making payments by the discoms to generation companies, leading to liquidity constraints for the power generation companies.

“Though this augers well for the power generation companies, the implementation of these provisions remains to be seen, given the challenges in securing the large quantum of LCs by the discoms, in view of the loss-making operations of the discoms in majority of the states.  More importantly, cash flow improvement in a sustainable manner is critical for discoms, which requires adequate tariff revision, operating efficiency improvement and timely subsidy support from respective state governments,” said Sabyasachi Majumdar, group head - corporate ratings, Icra Ltd.

While the stricter directive issued by the ministry of power is a positive step for the sector, the implementation of these provisions remains dependent on the support extended by the state governments to the discoms. This measure may face resistance from the state governments, given that the non-provision of LCs would lead to supply curtailment and in turn load shedding in the distribution license area, he explained.

Significantly, while the power purchase agreements (PPAs) and power sale agreements (PSAs) tied-up between the generation companies and discoms have the provision for payment security mechanism in the form of LCs, the provision was not implemented by the discoms in most of the states.