India has been under a nation-wide lockdown since 24 March 2020. This column examines the initiatives taken by the government to minimise the impact of circuit-breaker measures. Realizing the importance of continuing operations in the power sector, the Ministry of Power (MP) requested state governments to allow interstate power generating stations to continue to operate, by permitting the movement of staff and equipment. Similar requests by the MP were also made in respect of the continuation of power transmission activities. To protect thermal power plants, the MP also requested state governments not to restrict production or movement of critical materials for power generation such as coal, chemicals, gases and so on, and of intermediate or finished products to or from such plants.
In 2019, the MP had directed load dispatch centres to send power to distribution companies (discom) only after security for 100% of the power to be drawn had been lodged by the respective discom. This requirement has now been reduced to 50% because of the cash flow difficulties that discoms face during the lockdown. To avoid a domino effect on generation and transmission companies, the MP has clarified that there is no change in the obligation to pay under their power purchase agreements (PPA) or to pay for capacity charges and transmission charges.
To ease the stress on discoms, under section 107 of the Electricity Act, 2003 (EA), the government issued a directive to the Central Electricity Regulatory Commission (CERC) that it should reduce late payment surcharges (LPS) imposed when distribution and transmission licensees delay payments beyond 45 days. Accordingly, the CERC issued an order on 3 April 2020 reducing to 12% the LPS payable by distribution companies to generation companies, and in respect of inter-state transmission delays beyond 45 days, if that period expired or will expire between 24 March 2020 and 30 June 2020. The reduced LPS is applicable only where tariffs have been determined under section 62 of the EA. Where tariffs have been determined through transparent bidding under section 63 of the EA, the LPS is still determined by the terms of the PPA or transmission services agreement.
For renewable energy (RE) developers, particularly in solar and wind, the lockdown has posed a real risk of curtailment due to the fall in demand. The Ministry of New and Renewable Energy (MNRE), in an office memorandum of 1 April 2020 reiterated the existing position that renewable energy generating stations have must-run status, and that they should not be curtailed except for grid security reasons. The discoms were also asked to continue making payments to such generating stations. Despite the memorandum, news reports suggest that several states including Uttar Pradesh, Andhra Pradesh, Madhya Pradesh and Punjab have sought curtailment of renewable power on the grounds of force majeure. Media reports also suggest the Solar Energy Corporation of India (SECI) too has taken a view that due to the directions issued by the government granting must-run status to renewable generators, it is not open to discoms to have recourse to force majeure provisions in the power sale agreements.
Those RE projects that have not yet achieved their scheduled commissioning were granted a blanket time extension by the MNRE on 17 April 2020 lasting for the duration of the lockdown plus an additional period of 30 days, through an office memorandum. While this office memorandum is binding on central implementation agencies such as SECI and NTPC Limited, it was worded as an advisory for state departments. This step by the MNRE may bring clarity and reduce disputes, as the standard PPA of the SECI under the Jawaharlal Nehru National Solar Mission and SECI-discom PSAs do not specifically include epidemic, pandemic or lockdown as force majeure events, which may have caused confusion. However, those developers whose projects fall within the ambit of state departments will have to wait for more clarification on extension or depend on their PPAs.
The cash flow problems of the discoms are likely to be exacerbated during the lockdown, with reduced industrial/commercial demand and payment delays across consumer segments. This will, in turn, affect their payment obligations to the generators, notwithstanding various circulars by the MP and MNRE. The discoms need an urgent fund infusion, while the sector as a whole may need recalibration of asset classification norms by banks to avoid non-performing assets. The measures introduced by the government so far may not be sufficient to alleviate the liquidity crisis in the power sector. The government has indicated that it will introduce further measures to improve liquidity in this sector, but for now everyone must wait and watch.
Abhishek Tripathi is the managing partner and Mani Gupta is a senior partner at Sarthak Advocates & Solicitors.