India E-Mobility Show

MNRE issues clarification on payment security mechanism for gencos

The Ministry of New and Renewable Energy (MNRE) has issued a clarification on the power ministry’s latest order that makes it mandatory for distribution companies to open and maintain adequate Letter of Credit (LC) as a payment security mechanism for generation firms.

The 28 June order had stated that even in the event power is not dispatched for any reason the distribution licensee will continue to pay fixed charges to the generation companies.

In the case of solar, wind and small hydro power, “fixed charge” would constitute the tariff on which the power is being purchased by the distribution licensee as it reflects the cost of installation, operation and maintenance of the power plant, MNRE has clarified.

“The energy generated during the non-dispatch period shall be calculated on the basis of Capacity Utilization Factor as declared by the generators in the Power Purchase Agreements, and for projects having more than one year operation, the power not dispatched shall be calculated on the basis of pro-rated actual energy generated in the last twelve months,” MNRE said in its clarification.

The implementation of the power ministry order beginning August will benefit the generators, as the power supplied to discoms is conditional upon the opening of an LC for an amount adequate to cover the entire quantum of power to be supplied. Once an LC is opened, it will be communicated to the load despatch centre, enabling generators to recover any overdue amount by invoking the LC when a discom does not pay on time.

Delaying payments to generators has helped discoms manage their working-capital cycles, meet short-term obligations and avoid costly working-capital loans. This extra working-capital cushion, leveraged extensively by discoms, will not be available now, compelling discoms to raise additional funds either through internal accrual or state-government support in the form of grants or bank borrowings to finance operations.