Power ministry order on LCs to face challenges: India Ratings
Load-shedding would be politically sensitive and push back is likely from discoms and state governments against the timeline for implementing the power ministry order and its consequences.
Distribution companies (discoms) would have to create LC for about Rs 30000 crore before August 2019, if the circular has to be implemented.
Clarity on payment of existing dues is still awaited. Additionally, given the erratic payment behaviour of discoms, banks could issue LCs subject to 100% margin back–up. The standalone credit profiles of several discoms are frail; therefore, LC issuance by a bank could be a litmus test for discoms, the ratings firm said.
While the insistence on establishing LC could create credit discipline in the long term, it is vital for discoms to address the issue of mounting payment delays. Both the financial restructuring plan (2012) and UDAY (2015) have only provided short-term respite; a sustainable solution to the quandaries of the power sector has proved to be elusive, it said in a statement.
The consequences of non-creation of LC include stopping despatch from generating companies, preventing trading through power exchanges, and not allowing short-term open access. These consequences are quite severe as they could force discoms to resort to load-shedding; thus, this could prove to be effective for ensuring timely payments from discoms, it said.
Load-shedding would be politically sensitive and push back is likely from discoms and state governments against the timeline for implementing the power ministry order and its consequences. Discoms have to pay fixed charges even if despatch is stopped for the above reasons. Generally, PPAs require the creation of LCs for at least one month’s billing, which is unconditional and irrevocable, for a tenor of one year. However, till date, the establishment of LC has been a mere clause in PPA, with actual implementation not adhered to.
"Operationalising of the mechanism to ensure opening of LCs might not be a straightforward process, as severe cash crunches have rendered some discoms incapable of paying power purchase bills in a timely manner. Cash crunches could be caused by delays in subsidy realisation from state governments, high receivables, or high aggregate technical and commercial losses. Improvement in the cash flows would require continuous concerted efforts; however, the notified framework for controlling despatch based on opening LCs and timely clearing of power purchase dues could create urgency in discoms and state governments to make the discoms operate profitably,"it said.
In Ind-Ra’s portfolio, none of the thermal projects have the benefit of LC from counterparties. Among rated renewable SPVs, Bangalore Electricity Supply Company Limited has created all required LCs; NTPC Limited has created LCs under some PPAs; and no LC has been created under the PPAs signed by Solar Energy Corporation of India (SECI).