The following story, prepared on the basis of a report by ICICI Securities Ltd, provides a gist of the important power sector-related reforms announced by the Central government, over the past few days.
PFC/REC loans: The fiscal support includes measures such as PFC/REC loans to discoms to the tune of Rs.90,000 crore (in two tranches), one-time rebate of 20-25% on fixed charges for the duration of the lockdown by CPSU gencos/transcos to discoms (a support of around Rs.30,000 crore till May 17, 2020), privatisation of distribution of union territories, opening up commercial coal mining to private players without end-use restriction, incentivising coal gasification/liquefaction, spending Rs500bn on infrastructure development to achieve Coal India’s production target of 1 billion tonnes by FY24.
PFC and REC have been mandated to extend Rs90,000 crore worth of special long-term transition loans for up to 10 years to discoms, conditionally, in two equal tranches. Loans from tranche-I will require unconditional and irrevocable guarantee from state governments covering the loan amount plus interest and other charges. Loans from tranche-II will be conditional on loss reduction and performance improvement.
PFC/REC may offer a moratorium (only on principal) not exceeding three years, but interest will have to be serviced regularly (monthly). Interest rate will have a spread of up to 150bps over the cost of funds.
Coal: Several announcements were made to increase coal production in the country which will help reduce imports and strengthen the coalrelated infrastructure which will reduce the seasonal non-availability of domestic coal. This also included allowing private participation in coal mining without end-use restrictions, announced in Jan’20 through Mineral Laws (Amendment) Ordinance, 2020. GoI will invest up to Rs500bn to improve coal mining-related infrastructure which will help in achieving CIL’s target of 1bnte by FY24.
Privatisation of distribution of UTs to set precedent: Aware of the sub-optimal performance particularly of state discoms, the government will be privatising the distribution in union territories and set a precedent for states in reducing losses and improving services to customers.
National Tariff Policy: GoI seems keen to address several pending issues in the sector through the National tariff Policy, a brief overview of which was also presented. It will further help improve the sustainability of the sector, strengthen consumer rights, improve services and promote investments.
These measures are over and above the recently announced draft Electricity Act amendments and investments through National Infrastructure Pipeline.
Detailed Analysis
PFC/REC loan: The total package is of Rs.90,000 crore in the form of subsidized loans to discoms. The loan from PFC/REC may be directly paid to creditors which is a very big positive. As of March 31, 2020, the total overdue (out of the total payables by discoms to power companies (generation and transmission) of around Rs.94,000 crore was Rs.76,500 crore for gencos. This amount is mainly old dues (pre-October 2019) and has been increasing since due to addition of late payment surcharge. Of the abovementioned amount, a large part is now expected to be received in one go. This will be positive for the gencos and coal companies and improves the liquidity in the entire value chain. We are awaiting clarity on the timelines of the implementation of the scheme.
Overdue amount up to March’20 is CPSUs – Rs.31,100 crore, state gencos – Rs.20,400 crore, and private (incl renewables) – Rs.24,800 crore.
Privatisation of power distribution: The government expects that privatization will lead to better service to consumers and improve operational and financial efficiencies in distribution in these areas, providing a model for emulation by other discoms across the country.
The Finance Minister also indicated that it will be implementing prepaid meters in all the UTs, which will result in the customers paying the complete bill and the government subsidies being transferred through DBT mechanism to the consumers’ accounts.
The union territories which currently fall under the purview of the Government of India, include Chandigarh, Delhi (already privatized), Puducherry, Dadra & Nagar Haveli, Daman & Diu, Jammu & Kashmir, Ladakh, Andaman & Nicobar Islands, and Lakshadweep.
National tariff policy: The MoP had been working on the National Tariff Policy since the past one year, but has been facing objections to some of the proposals from the states, mainly on the higher say which the Centre will have after the amendments. However, due to the financial stress emerging from Covid-19, state discoms are now facing increased liquidity concerns and lack of availability of funds at viable rates, giving GoI an upper hand in the negotiations.
The presentation of the finance minister highlighted the following reforms in the expected tariff policy:
- DISCOM inefficiencies not to burden consumers
- Standards of Service and associated penalties for DISCOMs
- DISCOMs to ensure adequate power; load-shedding to be penalized
- Progressive reduction in cross subsidies
- Time bound grant of open access
- Generation and transmission project developers to be selected competitively
- No Regulatory Assets
- Timely payment of gencos
- DBT for subsidy; Smart prepaid meters
Coal Sector: The Finance Minister reiterated the details of the Mineral Laws (amendment) Ordinance, 2020 (announced in Jan’20), which opens up commercial mining of coal to the private sector. Coal mining will now be opened for private sector participation, without any end-use restrictions (removing distinction between captive and non-captive mines), based upon revenue sharing mechanism instead of the fixed Rupee/tonne. The government will liberalise entry norms for private sector participation, which will have no eligibility conditions (only upfront payment with a ceiling), and will immediately offer up to 50 blocks for auction.
As against the earlier provision of auction of only fully explored coal blocks, now even partially explored blocks will be auctioned. Government will also allow private sector participation in exploration. Earlier than scheduled production will be incentivised through rebates in revenue-share.
(Source: Report prepared by ICICI Securities Ltd)
