The state and central government owned plants are not covered under this arrangement
The power ministry has clarified that the applicability of letter of credit (LC) as the payment security mechanism (PSM) for power generators will be made for the power purchase billing cycle from August 1, 2019, and not before that. Further, the ministry said the state-owned and central generating stations are not covered under this arrangement.
The ministry said its communication issued on July 23 was necessary as some states had sought clarification on the applicability of letter of credit as they had sought clarity on the date from when it will come into effect. States also wanted to know whether it will cover the state-owned and central generating stations. In view of the ministry's clarification, if the generating company sends a bill in the first week of September for the month of August power purchase, the first payment will fall due in October.
The ministry in its previous communications released on June 28 and July 17 had mandated the distribution companies to open and maintain the letter of credit as PSM. However, the ministry observed that despite a provision in the power purchase agreement (PPA), the letters of credit were not given by the distribution licensees or procurers of power.
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- The ministry had asked discoms to to open and maintain the letter of credit to generators
- The state and central government owned plants are not covered under this arrangement
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''This makes it difficult for the generators to pay for the fuel, which has to be prepaid, 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 and transportation leading to a shortfall in power generation.'' The ministry said there will be widespread load shedding on account of lack of generation and therefore it is essential that the distribution licensees have /to implement these provisions strictly.
Credit rating agency Icra in its analysis said the Centre's mandate with regard to opening and maintenance of adequate letter of credit would be positive for the power generation companies. This is following the continued delays in making payments by the discoms to generation companies, leading to liquidity constraints for the power generation companies. However, the implementation of these provisions remains to be seen, given the challenges in securing the large quantum of letters of credit by the discoms, in view of the loss-making operations of discoms in most states,'' Girishkumar Kadam, sector head & vice-president, Icra, said.
The power ministry in its communique had said that the national load despatch centre (NLDC) and regional load despatch centre (RLDC) would despatch power only after it is intimated by the generating company and distribution companies that an LC for the desired quantum of power has been opened and copies made available to the concerned generating company. According to the ministry, the concerned generating company would be entitled to encash the LC after the expiry of the grace period, which is 45 to 60 days as provided in the PPA.
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