Authored by Abhishek Tripathi and Anura Gupta

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.

But a sector that is staring at the prospect of several bankruptcies, needs further support. The facility of a centralized public financial institution like Power Finance Corporation discounting invoices of the gencos and recovering the sums later from discoms will help. Central public sector undertakings like NTPC or NTPC Vidyut Vyapar Nigam acting as aggregators for purchasing power from other gencos through a transparent bidding process, at least till NTPC’s capacities are commissioned, may help put some life into stranded private sector power capacities. Ensuring that discoms are made to pay late payment surcharges will also help instil some discipline and improve financial viability and bankability of power projects.

Payment security models such as the one used by NTPC, involving a tripartite agreement with the Reserve Bank of India and the discom, which authorizes the central bank to debit the discom’s or state government’s account in the event of default could be considered for the private sector as well.

Another challenge that needs to be addressed by the government is in the hydropower sector. For several years, hydropower generation has suffered due to environmental and rehabilitation issues. Projects have become unviable due to cost overruns and lack of long-term PPAs. The sector has also suffered due to geopolitical issues, particularly linked to states such as Sikkim and Arunachal Pradesh. The government hopes to renew private interest in hydropower by notifying large projects as renewable power, however, structural issues in project development need to be addressed to attract private investment.

On the consumption side, reduction in goods and services tax on electric vehicles (EV), customs duty exemption on import of EV parts, and income tax deduction of `150,000 (US$2100) on purchase of EVs should help the sector. However, for an EV revolution to take effect, regulatory architecture may need altering. Mass adoption of EVs will pose challenges for grid stability and grid management. Regulatory flexibility will be required in permitting different pricing mechanisms for EV charging to ensure that the grid is not adversely impacted, while the price will have to be competitive compared with diesel and petrol. Pan-India open access, which is not burdened with cross-subsidy surcharges, should be implemented at least to charge infrastructure operators to ensure consistent supply of electricity at viable tariffs.

If India’s development story is to carry on, power generation and distribution need urgent attention. The former needs support of the ecosystem, and the latter needs disciplining. One hopes that the government is alive to these needs and will act sooner than later.