27 power DISCOMS barred from power spot market

As the outstanding dues of the power distribution companies (DISCOMS) to the power generation companies (GENCOS) rise, there is a new strategy being adopted by the Power System Operations Corporation (POSOCO). IT has barred these 27 DISCOMS of 13 different states in India from buying and selling power on the power exchanges (principal IEX). This order will be effective from 19th August, so from Friday onwards, these DISCOMS cannot participate in power trading on the IEX or other exchanges. How big is the hassle?

Let us first look at the size of the dues. As of the last reported quarter, the total dues of these DISCOMS amount to Rs5,000 crore with the DISCOMS in the state of Telangana in South India owing the highest amount of Rs1,380 crore. These are the dues that the DISCOMS have to pay to the power generation companies. This could pose a problem for the DISCOMS since most of the DISCOMS have been active in power trading, depending on whether they are surplus in power production nor deficit in power production.

The thirteen states where the DISCOMS have been barred from participating in power trading from 19th August include the states of Chhattisgarh and Madhya Pradesh in central India; Maharashtra and Rajasthan in Western India; Karnataka, Andhra Pradesh,  Telangana and Tamil Nadu in South India;  Jammu and Kashmir in North India and finally the states of Bihar, Jharkhand, Manipur and Mizoram in Eastern India. The defaulting states are predominant in South India, in terms of numbers and in terms of dues outstanding.

The development is an outcome of the introduction of the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, which had been officially announced in the month of June 2022. The rules stipulate that in the case of non-payment of dues, by the DISCOMS, even after 75 days of the presentation of the bill by the GENCO it would attract penal action. Even in case of default of payment of instalments by the DISCOM, the short-term access for sale and purchase of electricity including power exchange will be barred. 

The rules also stipulate that once the outstanding dues are settled, the access to power trading shall be restored not later than 2 days after the receipt of the dues. In the previous months itself, the GENCOS had started regulating the supply of power to these DISCOMS. For instance supplies in Meghalaya and Sikkim have already been cut by a quarter. This has been seen as a good strategy to persuade these states to rapidly pay up their dues to GENCOS, since they cannot afford to be off the power trading system for too long.

Currently, in the event of the dues being unpaid, the GENCO will only supply 75% of the contracted power while the balance 25% will be sold by the GENCO directly through the power exchanges like IEX. The overall dues of the state DISCOMS to the GENCOS has surged to Rs1.50 trillion and any laxity in collections can create a major working capital conundrum for the power generation companies. This barring from power trading is more of a pre-emptive measure meant to ensure that DISCOMS do not default on dues to GENCOS. 

One way out could be a one-time settlement scheme for the power DISCOMS and the government has already committed to provide a funding of up to Rs1.45 trillion via Power Finance Corporation (PFC) for the same. For now, the question is whether there would be an impact on the volumes on the IEX. There is likely to be some temporary disruption but eventually even the GENCO will sell the 25% power through the power trading platform only. This is only intended as a dissuading measure to prevent wilful defaults on power loans.