The Power Ministry has made it mandatory for power distribution licensees to open and maintain adequate Letters of Credit (LoC) as a payment security mechanism under Power Purchase Agreements (PPAs).
For existing PPAs, these will have to maintained from August 1, 2019, a ministry statement said.
Commenting on the decision, RK Singh, Minister of State for Power and New & Renewable Energy (Independent Charge), said: “This will change the system and the (power) sector will become viable.”
The ministry issued the order for setting up the payment security mechanisms on Friday.
Adequacy of Loc
“The PPAs have the provision regarding maintenance of adequate payment security mechanism, mainly in the form of LoC by the distribution licensees/procurers of power. A robust payment security system requires adequacy and validity of LoC to cover the payments due on account of drawal of power,” an official statement said.
“It has been seen that despite the above provisions, the LoCs are not being given and there is huge outstanding on account of unpaid power bills. This makes it difficult for the generators to pay for the fuel, which has to be pre-paid, to continue the generation.
“The generators are also required to pay to the Railways in advance for the rakes. If this situation persists, the generators will not be able to pay for fuel/transportation, leading to shortfall in generation of electricity. There will thus be widespread load shedding on account of lack of generation.
“It is essential, therefore, that all the provisions mentioned above are implemented strictly,” the statement added.
Per the order, National, Regional and State Load Dispatch Centres are directed to dispatch power only after they are told by the power generating company and the Discoms that an LoC for the desired quantum of power has been opened and copies have been made available to the concerned generating company.
The NLDC and RLDC shall be told the period and quantity of power supply. The dispatch shall stop once the quantum of electricity under the LoC has been supplied. The generating company is entitled to encash the LoC after the expiry of the grace period, usually 45 to 60 days, as provided in the PPA.
Commenting on the move, Ashok Khurana, Director General at the Association of Power Producers, said: “States may oppose this step to discipline them but they need to recognise that they cannot keep on buying power without paying and make generators default in their debt obligations and payments towards their coal and Railways payments, causing curtailments in power production.”