mobile
Energy
 
CII Media Releases
 
Double Whammy For Power Sector – Liquidity and Demand Crunch
Apr 17, 2020

The Power sector, one of the essential services under the lockdown till 3rd May is battling the twin issues of demand and liquidity compression. Latest data from POSOCO indicates that the total demand per week between 23rd March and 12th April was ~18 BU, compared to ~23 BU during the week of 9-15th March (before Janata Curfew and lockdown), 25-28 percent reduction in demand.

The further extension of the lockdown could result in additional demand compression of ~15-20 BU, implying a net revenue loss of Rs. 25000 to Rs. 30000 crores for the DISCOMs. This will further increase the liquidity crunch to ~Rs 45000 to 50000 crores, in addition to the Rs 90,000 Cr dues pending by the DISCOMs to generating companies’ pre-lockdown.

“Both the transition finance as well as structural reforms are essential in tandem. Recent experience suggests that a financial restructuring package without insistence on structural reforms leads to temporary alleviation of the problem in the sector followed by eventual recurrence of the core problems of liquidity. We therefore propose that the post COVID-era is the right time to undertake an ambitious overhaul of the sector, as a precondition for providing transition financing”, said Mr Chandrajit Banerjee, Director General, CII.

Thermal generators could face additional INR 20,000-25,000 crore cash crunch. RE generators have been bearing the brunt of power curtailments, overdue payments by state DISCOMs of INR ~10,000 crores and policy uncertainty. Further, 20-25% of debt of RE projects comes from overseas lenders, to whom the 3-month moratorium by RBI will not apply. Transmission companies are facing delays in on-going projects as lockdown has affected the movement of manpower and supply resulting in delays and the manufacturing sector employing 2 million people across 4000+ SMEs could be at stake.

In such a scenario, it becomes increasingly important to inject liquidity in the sector to ensure continuous supply, power generation viability and robust industrial recovery post lockdown.

The Confederation of India Industry’s white paper ‘Sustaining India’s Power and Renewable Energy Sector in the Wake of COVID19’ analyses this impact of COVID- with the demand reduction coupled with delays in collections.

This CII White Paper assesses the emerging implications of COVID and lockdown on the electricity sector, and lays out a set of potential steps in the near and medium term to address the impact and solve for the longer-term viability.

Short-Term:

Ensuring short-term liquidity management: Creation of special line of credit through PFC/REC to DISCOMs with directives to clear at least 2/3rd of receivables

Minimizing cash outflows: Allowing deferral of payments of indirect taxes such as electricity duty; coal cess and extending credit to generators by Coal India for 30-45 days for coal procurement and CERC considering waiving off cross subsidy surcharge

Mitigating impact of delays in on-going Renewable (RE) projects: An increase in tariff, based on an impact analysis of relevant projects, to be allowed in the PPAs of ongoing RE projects which have been hit adversely, to compensate for the unforeseen financial impact of the lockdown

Power Transmission as Force Majeure: Notification from Ministry of Power recognizing the outbreak – including the recovery period – as a Force Majeure event for transmission projects being developed under TBCB and Cost Plus routes, with appropriate time and cost relief

Even under this stress situation, the support of Central and State governments extended to the industry in the form of multiple measures and announcements across operational, regulatory and financial relief over the last couple of weeks, trying to bring relief to the power sector is commendable.

Medium-Term:

Structural reforms

Tariff and regulatory reforms: Develop a roadmap to implement cost-reflective tariffs and rationalized tariff structure with lower commercial and industrial tariffs. This can accelerate the recovery of economic activity and make Indian industry more competitive

Reforms in Power Distribution: Review the long-term ownership structure, operations and governance of DISCOMs with private sector participation being expedited across urban and semi-urban areas, either through ownership or franchisee models, with the right enablers and incentives. The central government could invest directly through a central holding company

Smart Metering and digital rollout: Develop a central government-led funding scheme for accelerating the rollout of smart metering (investment of ~INR 1.5 lakh crores over 4-5 years) and adoption of digital solutions for improving operational decision-making among DISCOMs, envisaged along the lines of the "hybrid annuity" model in the highways sector

Transition finance package: The liquidity crunch of DISCOMs is likely to worsen during and post the lockdown, and the gap may grow by 20–25 percent. The sector is likely to require significant transition financing to mitigate the impact.

The central power finance institutions (PFC, REC, and IREDA) to consider lending directly to DISCOMs or to discount the DISCOMs' outstanding dues using funds borrowed from banks or from their regular sources with guarantee by state governments and secured through Tripartite Agreement mechanism

Offer repayment moratorium of up to 6 months to DISCOMs (interest will continue to be paid) followed by monthly repayment over the next 54 months. In order to give effect to the state government guarantee, suitable adjustments to FRBM limits may also be required


17 April 2020
New Delhi

Email to a friend   Print
Download CII App:
App Store Google Play