In March 2019, the Power Ministry announced a rescue package designed to help stressed coal-fired power stations. The primary aim of this package was to protect the coal linkages of power plants with an aggregate capacity of 40,000 MW that were threatened by Power Purchase Agreements (PPAs) cancellations due to payment defaults by Distribution Companies (discoms). One of the definitive features of the rescue plan was granting a two-year period for these generation companies to secure alternative PPAs. Following this period, the coal linkage would be annulled if the generator failed to secure a medium or long-term PPA.
Addressing the Issue of Discom Dues
Distribution company (Discom) dues present one of the most significant challenges in the country. Starting from August 1, 2019, the government has mandated state distribution companies to offer letters of credit as part of the payment security mechanisms in power purchase agreements. This strategy aims to ensure financial security and regular payments to power generation companies.
Understanding The Role of Letters of Credit
A Letter of Credit is a legal document that guarantees the buyer’s payment to the sellers. In this case, it represents a tool to guarantee the discoms’ debts to the generation companies. National, Regional, and State Load Dispatch Centres can now only dispatch power upon receiving confirmation from the Discoms that a Letter of Credit for the required amount of power has been opened and that copies have been provided to the relevant generating company.
Payement Default and the Invocation of LCs
The power purchase agreement offers a grace period of 45-days or 60-days for clearing dues. If the Discoms default on their payments beyond this period, the LCs can be invoked. This measure allows the generation company to receive the due payment and mitigate potential financial losses.
Interesting Facts: The Power Industry in India
| Fact | Details |
|---|---|
| Coal-based power generation capacity | 40,000 MW |
| Introduction of LCs in PPA | 1st August 2019 |
| Purchase agreement grace period | 45 – 60 days |
| Validity of coal linkages after PPA default | 2 years |
Source of Information and Credibility
The provided information is based on reliable sources and has been cross-checked for accuracy. The details were gathered from an article published by The Times of India.
