As part of its strategy to get its damaged economy back on track, India is working on a potential bailout package for the power sector; temporarily reducing electricity tariffs, providing concessional finance, and clearing around 1 trillion of outstanding charges from electricity distribution companies (discommodities) by state-owned financial institutions, two government officials said.
This package is part of the long-awaited stimulus program to counter the economic instability of the coronavirus lock-up that has exacerbated the already fragile finances of government discomfort. Throughout the lockout, the market for power moved to households, resulting in lower realizations. With the peak demand for electricity dropping, the need for commercial and industrial power came to a head after several factories had shut down.
Prime Minister Narendra Modi will address the country on Tuesday evening at 8:00 p.m. as the 54-day national lockout ends on 17 May.
Energy consumption, in particular electricity and refinery goods, is generally related to the overall demand in the economy.
The Power Package can work like this. The new tariff system has two components — a fixed cost, which is the investment made in power generation equipment, and a variable cost or cost of fuel. Even if the discom does not purchase the electricity contracted for, it has to pay the fixed cost. The government is considering a temporary adjustment in the electricity tariff structure that will waive the fixed-cost portion even if states do not purchase the electricity they have contracted for. This is projected to result in savings of about Rs2000 crore to discoms on behalf of the Central Public Sector Units (CPSUs) alone.
In addition, the state-owned Power Grid Corporation of India Ltd. will waive charges for the interstate transmission of electricity to discomfort during the lock-down time, which will result in savings of approximately 1,400 crores.
“State governments have requested relief from payment of fixed charges pertaining to unscheduled power and capacity," said a senior government official requesting anonymity.
This comes in the background of the Fifth Meeting of State Chief Ministers with Prime Minister Narendra Modi on Monday.
“The Chief Ministers in their suggestions on economy have sought support to MSMEs, Infrastructure projects like power, easing of interest rates on loans and assured market access to the agricultural produce," the Prime Minister Office said in a statement on Monday.
Deprived of taxes, states have exceeded their borrowing caps. Decreased flow of funds from the Center and minimal tax increases following the implementation of Goods and Service Tax (GST) have added to their financial problems.
Other steps in the works include allowing for a one-time relaxation of the borrowing limits levied under Ujwal DISCOM Assurance Yojana (UDAY) aimed at reversing debt-ridden state power distribution companies. Operating capital borrowings from banks and financial institutions, which could be up to 25% of last year's revenues, would be enabled to clear their debts to traditional and renewable power generation and transmission companies.
According to documents reviewed by Mint, “It is proposed that Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) will raise an amount of about ₹90,000 crore from the market against the receivables of discoms from the state Governments in the form of electricity dues and subsidy not disbursed as existing on 31st March, 2020, and pay the central public sector unit (CPSU) Gencos and Transcos, IPPs (independent power producers) and RE (renewable energy) generators on their behalf so as to their liquidate outstanding dues of about ₹94,000 crore."
The state owned PFC and REC have assets of $80 billion and are the main lenders to the power sector. The aim is to clear the backlog of payments with concessional loans backed by the respective state governments.
“These loans would be disbursed in two tranches and will be linked to certain reforms, viz., increasing digital payment interfaces; prepaid metering in government departments, making action plans for loss reduction, etc," the document added.
The union power ministry spokesperson declined to comment.
With some projections that the Indian economy is likely to announce its first contraction in more than four decades, the government's goal is to use its limited resources effectively.
The Government of the National Democratic Alliance (NDA) has planned a series of reforms in the power sector, including the introduction of the Direct Benefit Transfer (DBT) scheme in the electricity sector to better reduce subsidies, encourage market competitiveness and enforce financial discipline. Pursuant to the draft Electricity Act (Amendment) Bill 2020 of the Electricity Act , 2003, the Government has developed a cost-reflective tariff and an Electricity Contract Compliance Authority to implement Power Purchase Agreements (PPAs).
