RRECL SUSPENDS APPROVAL OF PROJECTS UNDER REC MECHANISM IN THE STATE

The approval of all renewable energy projects under the REC mechanism has been suspended by the Rajasthan Renewable Energy Corporation Ltd (RRECL) in an order dated 4/09/2017. The order also states that no new RE projects under REC mechanism will be approved by the state level screening committee (SLSC) until further orders. As per an RRECL official, after the lowest solar tariff was quoted in the state, the DISCOMs which are purchasing power through the REC mechanism at a higher rate and even then, are unable to fulfill their RPO obligations. Due to these reasons, RRECL has taken this step until further notice.

 

The article covering the same can be accessed here.

INSOLVENCY PETITION FILED AGAINST TANGEDCO

Ind Bharath Group has filed an insolvency petition against TANGEDCO under the Insolvency and Bankruptcy code, 2016. This is due to the delay by TANGEDCO in the payment of dues of more than Rs 700 Cr. They claim that their funds are stuck in with TANGEDCO  due to which the they are unable to clear dues with their own creditors.  Chennai’s National Company Law Tribunal has been approached for the same and TANGEDCO has been given a week to file its counter.

 

The article about the same can be accessed here.

UDAY SCHEME BRINGS BENEFITS TO DISCOMS

The Ujwal DISCOM Assurance Yojna (UDAY) scheme was launched in November 2015 by the Ministry of Power (MoP) and the Government of India (GoI). Since then, there has been significant improvement in the debts of the DISCOMs.

 

The participating states have taken over Rs 2.09 lakh crores of debt of their DISCOMs. The remaining debt is mostly in the form of CAPEX debt or scheme based debt which usually either pays itself off or which converts into grants. Therefore, the process of the states taking over the debts of DISCOMs and issuing them as SDL bonds has now been completed. Now the remainder of the action which includes bond issuance by the DISCOMs has to be completed.

 

Due to these actions, till March 2017, the participating DISCOMs had achieved net savings of Rs 15,000 Cr. The gap between Average Cost of Supply (ACS) and Average Revenue Realized (ARR) had also come down by 14 paisa per unit along with a reduction of 1% in the AT&C losses.

Details about the UDAY scheme and its implementation on our blog can be accessed here.

FINANCIAL LOSSES FOR DISCOMS FALLING UNDER UDAY SCHEME DECREASE

In a recent analysis in the Financial Express, those discoms which are a part of the Ujjwal Discom Assurance Yojna (UDAY) scheme have seen a reduction in their financial losses by 21.5%.  This amounts to a saving of Rs 40,295 Cr for FY 2017. Even the states which were earlier burdened due to huge financial losses have witnessed a drop in the losses by a significant percentage. For example, Tamil Nadu saw a decrease of Rs 3,783 Cr in its losses which is a decrease of about 35%. The liquidity profile of the discoms has also improved, as per the ICRA.

 

The power ministry opined on this matter saying that “with more projects being awarded, there should be a palpable difference on the metering front – a vital area which helps to reduce technical losses and minimize outages”.  As of now, the number of distribution transformers being metered are just 45% of the target to be met by December 2017. Therefore, they are hoping that the situation will improve further.

 

Our previous analysis on the completion of one year of the UDAY scheme can be accessed here.

RECONNECT RECEIVES AWARD IN DIGITAL INDIA SUMMIT 2017

REConnect was awarded in the Digital India Summit 2017 in the energy and utility space by Times Now. A short program covering our flagship analytics product GridConnect was aired on Times Now on 17th June on ET Now and Times Now. To watch the telecast, please follow the links:

 

ET Now: https://www.youtube.com/watch?v=gmg9JPTIfDU

Times Now: https://www.youtube.com/watch?v=FI2VaV2nOnY&t=644s

AS PER STUDIES, EXPERTS ARE BAD AT PREDICTING SOLAR INSTALLATIONS

As per an article published by Visual Capitalist, organisations such as IEA (International Energy Agency) and EIA (Energy Information Administration), which have been predicting data on energy supply and demand as well as their forecast have been facing a number of challenges. Also, it can be said that these organisations are conservative with their forecast.

 

Source: Visual Capitalist

 

As per the graph, there is a huge gap between the historic data and the predictions by the IEA. None of the models have been able to rightly predict the growth in solar installations.

CERC DECLARES NEW REC FLOOR AND FORBEARANCE PRICE

Honorable Central Electricity Regulatory Commission has determined floor and forbearance prices for REC (solar and non-solar)  which will be valid from April 1, 2017 onwards. The prices have reduced significantly and the solar prices are set to reduce from Rs 3,500 to Rs 1,000 and the non-solar REC prices are set to reduce from Rs 1,500 to Rs 1,000.

 

No Vintage Multiplier has been proposed for any technology and existing vintage multiplier for Solar generating technologies registered in REC mechanism prior to 1st January 2015 and shall expire after 31st March 2017.

 

The proposed floor and forbearance prices are given below:

 

The following is the REC price trend:

 

The impact of this price reduction on different aspects is as follows:

Impact on existing REC projects:

  • Reduction in floor price will aggravate the financial duress of RECs based projects: Already the newly established REC projects are under distress. Reduction in the floor price will only aggravate the situation as the number of unsold RECs will increase.

  • No Vintage Multiplier: The draft does not clearly state the position on multiplier to be provided on existing inventory of RECs.

Impact on obligated entities:

  • Perverse gain for defaulting Obligated Entity: Obligated entities which are non-compliant will benefit from reduction in prices since they will have an option to purchase RECs and fulfill their RPO compliance at a lower rate. This has never been addressed by the CERC or the state ERC’s,

 

  • Potential higher demand going forward: Most captive and open access based customers will find it easier to buy RECs than to buy green power. Therefore, the low prices may lead to an increase in the REC demand.

 

Impact on the market:

  • Low Demand in March 2017: Since the new prices will be applicable from 1st April, 2017, March will see minimum demand as the Obligated entities will have an option to comply with RPO compliance in the next FY.

 

  • Higher Inventory and therefore lower clearing ratios: If the appropriate multiplier is provided to the existing inventory, the inventory of unsold RECs will jump to 3.6 crore RECS as compared to 1.7 crore RECs as present. Even lower clearing ratios will be experienced at exchanges if the demand does not increase in proportion.

Other issues:

  • Calculation of floor price

  • Validity of RECs

 

The previous analysis of CERCs floor and forbearance for financial year 2012 to 2017 can be found here.

UTTAR PRADESH ISSUES BONDS UNDER THE UDAY SCHEME

In an article in the Business Standard ,under the provisions of the Ujwal Discoms Assurance Yojna (UDAY) agreement, the state of Uttar Pradesh has issued bonds worth Rs 10,000 Cr. This is its second issuance against the debt of the discoms that it took over. The UP government had entered into a tripartite memorandum of understanding with the Ministry of Power and UPPCL to avail the benefits of UDAY which was aimed at helping the distressed power distribution companies with their finances.

Last year, UP was the first state to issue bonds having issued Rs 24,000 crore worth bonds by July.

REConnect performed a review of the UDAY scheme in one of it’s blogs. The link for the same can be found here

Review of UDAY Scheme on completion of one year

The UDAY scheme was launched an year ago, and was then touted as signature Discom reform scheme of the central government. In this article, we have analyzed the impact of UDAY scheme, responsiveness of the states, extent to which the Discom’s have got benefitted and also the reforms which they were supposed to undertake.

To briefly summaries, the UDAY scheme aimed at “financial turnaround of Power Distribution Compa-nies”.
Under the scheme, the state government was re-quired to take over 75% of the existing debt of the Discom and issue State Government bonds in re-turn.

The remaining 25% debt would be issued either as a bond by the Discom (guaranteed by the state gov-ernment) or the terms of the loan would be changed by the banks. In return, the Discom’s were required to undertake a series of reforms.

The key ones were:

  • Reduction of AT&C losses to 15% by 2018-19,
  • Quarterly tariff revision (to partly reduce the burden of large revisions once a year),
  • Reduce the gap between cost and revenue per unit to zero by 2018-19 and
  • Discom’s were to comply with RPO outstanding since April 2012 as per timelines suggested by MoP.

For a more detailed list of the requirements and for a detailed understanding of the scheme, refer our article here, or the scheme document here. After an year from launching, 17 states and UT’s have signed up for the UDAY scheme, while 15 have not. Notable states that have not signed up include Tamil Nadu, West Bengal, Kerala, Orissa, Assam and Telangana.
These states have relatively large Discoms and, espe-cially in the case of Tamil Nadu, significant accumulated losses and bank debt. Another way to look at this is the political affiliation of the state.
Most states that have signed up for UDAY scheme are associated or governed by BJP. Notable exceptions are Uttar Pradesh, Karnataka and Bihar. The only notable exception amongst the states that have not signed is Assam (governed by the BJP).

Bonds issuance:
8 states have issued bonds, aggregating to Rs 149,000 crore. The coupon rate (interest rate) on these ranges from 8.12% to 8.55%. Of the total bonds issued more than 80% are contributed by just 3 states – Rajasthan, UP and Haryana. To understand the impact of the bond issuance, we analyzed the balance sheet of one Discom (the Jaipur Discom). The key points are:

*Coupon rates are as per latest issuance
Total debt of the Jaipur Discom has reduced by Rs 5,722 crore, or 22% of the total. However, this ag-gregate number includes a significantly higher amount of debt that was directly taken by the Discom from the banks. This debt is now replaced with debt owed to the state government. Thus, while the debt burden of the Discom has not changed much, its the banks that have benefited the most – they now own government bonds (which are a very good asset to own), compared to Discom loans. The performance on the actions that the Discom’s were supposed to take is analyzed below.

Note : Additional Bank debt taken over in June 2016 – Rs 7,228 crore.

Tariff increases:
Of the 8 largest Discom’s analyzed, not a single Discom undertook tariff revisions on a quarterly basis. Further, there was a wide difference between tariff increases of different Discoms. Discom’s of UP, Punjab, Bihar, Jharkhand & J&K did not increase tariff at all. While Ra-jasthan increased domestic tariff by 2%, Chhattis-garh increased the same by 21%. It is important to note that while Rajasthan issued bonds of 58,000 crores, Chhattisgarh only issued bonds for Rs 870 crores (the lowest amongst all states).

Haryana raised domestic tariff by a respectable 19%Industrial tariff increased also show a similar story – Rajasthan raised tariffs by 1.67%. ,Haryana by 0.98%, while Chhattisgarh by 18%. Other states did not raise tariffs.
Renewable Purchase Obligations:
An important requirement of the UDAY scheme was that Discom’s were to be fully complaint of RPO  from April 1, 2012 onwards. The scheme document says the following with regards to RPO -
“Clause 9 – DISCOM’s opting for the scheme will comply with the Renewable Purchase Obligation (RPO) outstanding since 1st April 2012, within a pe-riod to be decided in consultation with MoP”


However, the MoU entered between the Ministry of Power and the Discom’s is completely silent on the RPO requirement. Prima facie, it appears that this point has been dropped by the Ministry. The only exception is the MoU with UP Discom, which has the following provision.
“Clause 1.3 (f) – In compliance with the Renewable Purchase Obligation (RPO) outstanding since 1.4.2012 to 31.3.2015, Discoms of UP shall fulfill RPO obligation 3 years after the Discom reaches break-even i.e. the Financial year 2019-20”
This clause presents several legal and practical prob-lems that will impact the REC markets significantly. Firstly, it is in direct contravention to the Electricity Act 2003 which obligates RPO on all consumption.

There is no provision for waiver or roll forward of such obligations. In light of this, can the MoP and UP Discom circumvent an act of the parliament and mutually decide a timeline for compliance? Further, the MoU wordings itself leave ample scope for further delay/ waiver when it says – “...3 years after the Discom reaches break-even…”. If the Discom does not reach break-even does that mean it will get further time?
In short, the original intent of the UDAY scheme re-sulting in RPO compliance has been abandoned by the Ministry of Power itself.
Reduction in AT&C losses:
AT&C losses remain very high for most Discom’s in the country. This is due to several reasons – weak distribution infrastructure being one. However, this caption is also a proxy for un-checked theft of power and un-metered supply. Even without the UDAY scheme, AT&C losses have been declining. However, since this data becomes available only at the time of ARR filing by the Discom, it is not possi-ble to verify if the decline has accelerated after the adoption of UDAY.

*Source: Forum of Regulators (FoR) Report
Conclusion:
The UDAY scheme has resulted in significant redrawing of the balance sheet of the Discoms. The beneficiaries of the scheme have been the banks, which were sitting on unsustainable levels of debt with loss making enti-ties. This debt has now been replaced with high quality government debt. However, in terms of real reforms and changes on the ground, whether relating to tariff increases or RPO compliance, there seems to be little that is changing. Unless the government follows through with actual op-erational changes, the story is likely to repeat itself over the next 5-10 years, where Discom’s will have again built up unsustainable debt and losses.

Our previous blog on Uday scheme can be accessed here.

Rajasthan Electricity Regulatory Commission exempts electricity duty for rooftop solar

The Rajasthan state government recently exempted the elctricity duty of 40p/unit for solar rooftop and captive units. It is expected that this electricity duty cut will have a positive impact on the new capacity lined up by the Rajasthan Electricity Regulatory Commission and also will help to close the 2300 MW rooftop solar capacity by 2022.

This step will create a lot of momentum in the rooftop segment and will encourage individuals and institutions to set up their own plants, thus contributing to the green energy while cutting down on their power costs.

Since Rajasthan has also announced net-metering policy (by which an individual can use the power they generate and the surplus can be fed into the grid), exemption of the electricity duty will be very beneficial to the consumers.

Recently, RERC also had issued a rate contract order for 25 MW & 5MW rooftop plants and empanelled companies to design supply and install these projects; under this the consumer will install a solar power plant and will not have to pay anything upfront.

The regulation can be accessed here.

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