Covid-19 has created a complex maze of power financing. Lockdown has pulled power demand down by 28%. Energy consumption fell by 25%. Downside in power demand would persist even after lockdown is lifted as subdued economic activity would take around a year to regain the lost height. As an essential service power supply and maintenance continue but meter reading, billing and collection are disrupted. Distribution Utilities (DISCOMs) in India collect Rs 60,000 crore a month from consumers. Traditionally, outstanding dues including subsidies used to be realised in March. High paying industrial and commercial consumers are more or less closed. DISCOMs have to give fixed charge waiver to them for the period of closure, which have implication of thousands of crore. COVID crisis might reduce immediate collections by about Rs.100 thousand crore. Beleaguered DISCOMs with financial losses of Rs 27,000 crore in 2018-19 are likely to make much higher losses in FY20 & FY21. They would not be able to collect payments even for already supplied electricity and would face huge difficulties to raise working capital. Their borrowing limit of 25% of previous year revenue is exhausted. If these challenges are not surmounted quickly, the resulting stress would soon pervade through the entire value chain including generation and transmission. Thus, demand for long term cheap finance from REC and PFC with 3-5 years moratorium is bound to increase.
As of January 2020, DISCOMs owed generators (GENCOs) Rs. 76000 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 Railway and coal companies. They operate at low Plant load factor (PLF) e.g. 57.61% in January 2020. With decreasing demand higher fixed cost for idle capacity would become payable resulting into further financial loss to DISCOMs. Therefore, inefficient generators may have to shut. GENCOs would defer the debt servicing payments in accordance with RBI guidelines. Ministry of Coal has recently permitted a shift from Sight Letter of Credit to Usance Letter of Credit as a COVID mitigation measure. They would reduce the cost of working capital for GENCOs. They can now lift quantities beyond the contracted ones without performance incentive, if coal is available. Coal India Limited has unprecedentedly high stock these days. Obviously, these measures should reduce the cost of power production and benefits must be transferred to consumers as demand booster.
PFC and REC have been the most favoured lenders to power sector. However, they face several challenges in raising cheap finances. Firstly, they are not deposit taking institutions and thus, their cost of borrowing is high. Secondly, due to reduced capitalisation of PFC after taking over REC, the cost of borrowing has further gone up. Thirdly, both PFC and REC would not get benefits of moratorium of interest payments recently announced by RBI, as banks are not providing this facility to NBFCs. But PFC and REC would have to extend advantage of moratorium to their borrowers which has implication of almost Rs 15,000 Crores each till June. On the borrowing front, they would require to raise Rs 25,000 Crores each by June to meet the regular discharge of their liabilities. Markets have limited liquidity and that increases cost of their borrowings. RBI has made Rs. 1 Lakh crore available to Banks through targeted long-term repo operations (TLTRO) window. Despite their high credit rating, PFC & REC do not get advantage of TLTRO as Banks get higher interest rates from reputed creditworthy corporates. Thus, PFC and REC themselves want funding from LIC and EPFO. They also insist on conditionality of State guarantee with budget provision to service the debt for lending to state power utilities, as it reduces the risk weight and improve their capital adequacy. Improved capital adequacy means better rating and lower cost of borrowing.
Corona pandemic is a force majeure situation. It has impacted not only business but individual consumers too. Transmission sector operates on 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, being the public face of power sector operate the riskiest business in the value chain, and would bear the major brunt of the demand shock due to COVID. If the risks of distributors are not shared by upstream stakeholders, the entire sector would become unsustainable. It is therefore desirable that fixed cost burden on distribution companies should be reduced. Railway can also think of usance LC mechanism as CIL has done. Return on equity of regulated entities should be revised downward and depreciation component can be deferred. Point of contact charges of Transmission utilities should be reduced. Non-essential expenditure which count for costing of power must be avoided.
States are already burdened with Uday borrowing. Prevailing pandemic would stress their resources further. State guarantee counts towards the borrowing limit stipulated under FRBM Act. However, during this unusual time experts are advising Government of India to borrow from RBI or borrow from 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 reasonable requirement of capital before central government permits States to borrow and capitalise power utilities with fiscal prudence.
As of January 2020, DISCOMs owed generators (GENCOs) Rs. 76000 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 Railway and coal companies. They operate at low Plant load factor (PLF) e.g. 57.61% in January 2020. With decreasing demand higher fixed cost for idle capacity would become payable resulting into further financial loss to DISCOMs. Therefore, inefficient generators may have to shut. GENCOs would defer the debt servicing payments in accordance with RBI guidelines. Ministry of Coal has recently permitted a shift from Sight Letter of Credit to Usance Letter of Credit as a COVID mitigation measure. They would reduce the cost of working capital for GENCOs. They can now lift quantities beyond the contracted ones without performance incentive, if coal is available. Coal India Limited has unprecedentedly high stock these days. Obviously, these measures should reduce the cost of power production and benefits must be transferred to consumers as demand booster.
PFC and REC have been the most favoured lenders to power sector. However, they face several challenges in raising cheap finances. Firstly, they are not deposit taking institutions and thus, their cost of borrowing is high. Secondly, due to reduced capitalisation of PFC after taking over REC, the cost of borrowing has further gone up. Thirdly, both PFC and REC would not get benefits of moratorium of interest payments recently announced by RBI, as banks are not providing this facility to NBFCs. But PFC and REC would have to extend advantage of moratorium to their borrowers which has implication of almost Rs 15,000 Crores each till June. On the borrowing front, they would require to raise Rs 25,000 Crores each by June to meet the regular discharge of their liabilities. Markets have limited liquidity and that increases cost of their borrowings. RBI has made Rs. 1 Lakh crore available to Banks through targeted long-term repo operations (TLTRO) window. Despite their high credit rating, PFC & REC do not get advantage of TLTRO as Banks get higher interest rates from reputed creditworthy corporates. Thus, PFC and REC themselves want funding from LIC and EPFO. They also insist on conditionality of State guarantee with budget provision to service the debt for lending to state power utilities, as it reduces the risk weight and improve their capital adequacy. Improved capital adequacy means better rating and lower cost of borrowing.
Corona pandemic is a force majeure situation. It has impacted not only business but individual consumers too. Transmission sector operates on 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, being the public face of power sector operate the riskiest business in the value chain, and would bear the major brunt of the demand shock due to COVID. If the risks of distributors are not shared by upstream stakeholders, the entire sector would become unsustainable. It is therefore desirable that fixed cost burden on distribution companies should be reduced. Railway can also think of usance LC mechanism as CIL has done. Return on equity of regulated entities should be revised downward and depreciation component can be deferred. Point of contact charges of Transmission utilities should be reduced. Non-essential expenditure which count for costing of power must be avoided.
States are already burdened with Uday borrowing. Prevailing pandemic would stress their resources further. State guarantee counts towards the borrowing limit stipulated under FRBM Act. However, during this unusual time experts are advising Government of India to borrow from RBI or borrow from 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 reasonable requirement of capital before central government permits States to borrow and capitalise power utilities with fiscal prudence.
About the Author
AK Verma
Author worked as Joint Secretary, Ministry of Power.
Author worked as Joint Secretary, Ministry of Power.
Dr. Verma is an Indian Forest Service (IFS) officer of 1986 Gujarat Batch. He has over 29 years of administrative and management experience. He was associated with the Government of Gujarat in various capacities including Conservator of Forests, Social forestry circle, Ahmedabad, Commissioner of Tribal Development and the Managing Director, Uttar Gujarat Vij Company Limited. Before joining Ministry of Power, Government of India he was posted as Member Secretary of Gujarat Ecology Commission, Gandhinagar and Project Director of the World Bank Funded Integral Coastal Zone Management. He had been Government Nominee Director on the Boards of various companies like REC, PFC, NHPC, SJVNL, & PTC.
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