Ideas for government to reform ailing power sector

The Narendra Modi government’s ambition to make India a US$5 trillion economy by the financial year 2024-25 will require many pieces to come together and the revival of the power sector will be central to meeting this goal. There were hopes that a second phase of power sector reforms would start during the first tenure of the Modi government, but in the absence of political consensus on some of the tougher reforms, they remained on the drawing board. The government, however, could have targeted some low-hanging reforms that were easier to push through. The Modi government, in its second term, appears serious about it.

The previous government had set up the PK Sinha Committee to suggest measures to address structural issues affecting distressed thermal power projects. Of the several suggestions made by the committee, the government has picked up the issue of payment security.

To address the concerns around payment security, the government drew in load despatch centres by making despatch of power contingent on the issuance and validity of letters of credit (LCs) by distribution companies (discoms) to generation companies (gencos). The load despatch centres are permitted to despatch power only up to the quantity equivalent to the value of payment secured through the LC.

In the event of non-payment, gencos have the right to encash the LC after a period of 45-60 days, subject to the terms in the power purchase agreement (PPA). If the despatch or scheduling of electricity ceases due to non-provisioning of LCs or exhaustion of the limit, discoms now have to pay a fixed charge to gencos. Discoms are not permitted short-term open access for purchase of power from power exchanges during the period their despatch is not scheduled due to non-opening of LC or advance payment. This move will go a long way in reducing cash flow stress faced by a large number of gencos.

Abhishek Tripathi is the managing partner of Sarthak Advocates & Solicitors. Anura Gupta is a principal associate at the firm.

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