The central government is reportedly contemplating on forming a national power distribution company (NPDC) to streamline the ailing power distribution network in the country, which is currently operated by state distribution companies (discoms). The proposed NPDC’s scope may complement the technical and implementation capabilities of discoms, especially in implementing central government schemes in the power sector, says India Ratings and Research (Ind-Ra). NPDC can co-exist with state discoms and own networks, and distribute power, forcing state discoms to increase their operational efficiency and doing away with political influences. In Compensatory Tariff Inevitable for Power Sector Reboot, Ind-Ra had indicated the need for buying power through a central government entity to address counterparty-related risks. Similar mechanisms are present in other geographies such as Peru and Brazil.
A central government-backed counterparty will enable many existing power projects, including small-scale, to access the capital market and avail fixed-interest bonds for a long tenure, thereby addressing counterparty-related risks and helping generation companies (gencos) in gaining better credit ratings at a standalone level. At present, the credit ratings of existing power projects are capped at a certain maximum level by credit rating agencies, considering the weak financial position of state discoms and delays in payables to generators. As a result, access to the capital market has been limited to only a few structured credit enhanced projects, such as Renew Akshay Urja Private Limited and Renew Wind Energy (Jath) Limited (both rated by Ind-Ra), despite the strong operating performance of many other projects.
According to the latest market reports, the outcome of Ujwal DISCOM Assurance Yojana (UDAY) until FY17 has been mixed. Of the 31 states that signed up for the UDAY scheme, only six states and one union territory have reported to have met the respective FY17 targets to reduce aggregate technical and commercial losses. Also, only 10 UDAY entities managed to narrow the gap between their revenue and costs until FY17. The proposed NPDC would help in developing an alternative to these state-owned discoms for power generators and will uplift the whole sector sentiment. The proposed NPDC could sign long-term power purchase agreements (PPAs) for Central Electricity Authority-projected upcoming thermal capacities as well.
The Ministry of Power has increased the renewable purchase obligation (RPO) target to 21.0% by 2022 from the current 17.0%. As per new norms, all entities that fall under the RPO should procure 10.5% of their total electricity from solar sources, compared with the current 6.75%, and another 10.5% of their power from other non-solar renewable sources by 2022, compared with the current 10.25%. In Ind-Ra’s view, the presence of an NPDC would lead to greater central control around the RPO compliance.
Another function of NPDC could be to act as an intermediary between gencos and discoms, aggregating power demand from discoms and tying up the same from gencos. Discoms, which are the weakest link in the power value chain, continue to restrain the credit profiles of many gencos, especially those that that are thermal-based. The presence of Solar Energy Corporation of India and NTPC Limited as counterparties in renewable projects enables such projects to gain better credit ratings and borrow funds at a cheaper rates compared with thermal projects. If the proposed NPDC operates as an intermediary, counterparty-related issues could be resolved, especially benefitting thermal plants. This is based on an assumption that they sign direct PPAs with gencos and power supply agreements with state discoms.
The bargaining power of the proposed NPDC with discoms might be better than any private gencos and similar to that of NTPC and Power Grid Corporation of India Limited. Supply under PPAs could be diverted by the proposed NPDC in case of non-payment of dues by state discoms. NTPC, Power Grid Corporation of India and Solar Energy Corporation of India are empowered to intercept central devolutions to state power utilities to pay generators in the event of continued payment delays. Should this be a function of the proposed NPDC, gencos’ cash flow issues could be resolved.
Ind-Ra has considered likely reservations from states about the proposed NPDC and a large amount of capex required as major challenges. The proposed NPDC may be implementable over a long period. Given the significant capex required to modernise distribution infrastructure, a central government entity may be much better placed than state discoms to implement the same. A central government entity can borrow funds at a 200-300bp discount compared with state entities.
Thermal power projects are affected by weak counterparties. On the other hand, given the revised target of 227GW by FYE22, renewable power projects are in dire need of a strong counterparty to significantly ramp up capacity from the current levels. Ind-Ra believes that the proposed NPDC is imperative to the success of power sector and to make faster progress on counterparty diversification. If the central government decides to stay close to at least some of the objectives mentioned above, the whole power ecosystem in India would benefit.
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