REGULATION | Staff Reporter, India

India urged to fix power policy mix-up

The government is expected to announce its second phase of reforms through Uday 2.0.

Whilst experts are expecting India to announce its second phase of power reforms soon through the Ujwal Discom Assurance Yojana (Uday) 2.0 soon, S&P Global Ratings said that the government has yet to address the systemic risks from ailing state-owned power distribution companies. S&P Global Ratings credit analyst Abhishek Dangra commented, "Discoms' weak financial health and payment delays will continue to weigh on the credit profile of Indian power companies."

Discoms under the new state government of Andhra Pradesh have attempted to renegotiate executed contracts, questioning the "must-run" status of renewables and resorting to curtailment in order to avoid paying under the power purchase agreements (PPAs). “This puts the fundamental long-standing credit protections for the power sector at risk,” said S&P Global Ratings.

Also read: Andhra Pradesh's deal renegotiations could derail $40b of renewables investment: report

Long-term fixed-price power purchase agreements (PPA) with the must-run status of renewables and merit order dispatch remain a key credit strength for power companies. “A must-run status guarantees dispatch on generation, barring grid stability issues. Such PPAs have helped offset the drag on power companies' working capital due to payment delays from Discoms—an industry norm,” it added.

Dangra noted that it is imperative for the power sector to honour the executed contracts before embarking on new ambitious plans targeting structural reforms. "In the past, PPA contracts have largely remained insulated to political changes. Exposure to political risk leading to contract renegotiation can entirely defeat the purpose of fixed-price long-term contracts if states can reopen contracts at will," he said.

The issue is expected to accentuate working capital pressure for power companies due to nonpayment of dues and create uncertainty on their future cash flows until it is fully resolved. “Cash flow visibility will be lost and project finance, which relies solely on the contractual and documentary framework, could be choked. Investors and corporates with deep pockets may be able to tide it out but not without scars,” S&P Global Ratings said.

Do you know more about this story? Contact us anonymously through this link.

Click here to learn about advertising, content sponsorship, events & rountables, custom media solutions, whitepaper writing, sales leads or eDM opportunities with us.

To get a media kit and information on advertising or sponsoring click here.