MoP reveals proposed amendments related to captive power plants in Electricity Rules 2005

Ministry of Power recently announced proposed amendments in the electricity rules 2005 related to provisions regarding captive generating plants. The captive power producers body ICPPA expressed their woes against the proposed amendments.  According to ICPPA, these amendments are aimed at creating new ways of earning Cross Subsidy Surcharge (CSS) from captive users.

The amendments state that any captive user whose ownership of that plant is not exceeding 15% shall not qualify the power plant as a captive power plant. The proposed amendments have associated the ownership of the captive power plant with the eligibility of being a captive user.

In case the captive user fails to abide by the rules, then the electricity generated by the plant will be considered as if its a supply element by a generating company.

ICPPA secretary Rajiv Agrawal while interviewing with Economic Times said that “If any user is forced to draw lesser power share due to genuine reasons like the closure of its end-use plant for maintenance then the whole power generated in a year will be treated as non-captive and state income will charge CSS on it. It means all users of CPP will also have to pay the penalty, and thus the CPP may have to close down.”

The amendments suggest each captive user utilize 51% of the generated electricity from the captive plant and in case of group captive, each member should have a 26% equity share in the plant to be able to utilize the power from the plant.

“Captive plant set up by a company or any other body corporate, shall mean the issued and paid-up share capital in the form of equity share capital with voting rights (excluding equity share capital with differential voting rights) only as per the provisions of the Companies Act, 2013. In other cases, ownership shall mean proprietary interest and control over generating station or power plant, Provided further that for the purpose of assessing status as captive generating plant, a normative debt : equity ratio of 70:30 will be considered i.e. at least 26% of the equity base of 30% of capital employed, in the form of equity share capital with voting rights (excluding equity share capital with differential voting rights) needs to be invested by Captive user(s).”

In our opinion, the proposed amendments can bring stability in the electricity sector and increase the workability of DISCOMs across the country. By suggesting the eligibility of captive plants to be associated with the ownership in the plant the commission is asking the captive users to conduct rightful investments and be responsible towards the generation from the plant.

Read the document here.

Rs.1.5 lakh crore loan recast for Discoms

In a recent article covered by The Times of India , it mentioned that the centre has agreed to provide loan to power distribution companies as their status at present is very low financially . In this restructuring exercise the centre has planned that state governments and the utilities take over the entire burden of Rs 1.5 lakh crore, instead of banks taking over half the liability.

The decision to restructure the power sector liabilities was taken at a meeting at the Prime Minister’s Office.The state governments will issue bonds of about Rs 1.5 lakh crore along with the discoms.

The package was approved after the finance ministry agreed to a staggered restructuring under which state governments, which will bear 50% of the burden, will issue bonds to banks in line with the dues. These bonds will fetch banks interest of 9-10% and will have a maximum 10-year term, said sources. In the process, short-term loans extended to the discoms will become longer tenure loans.

The restructuring was necessary as the discoms were under financial crunch and they are finding it difficult to pay their dues to the lenders. The state governments are not allowing to increase the electricity prices whereas the cost on the other side has gone up resulting in stagnant revenues and losses.

Power Distribution Utilities to be rated by Ministry of Power

In an interesting article of The Hindu Business Line, a new rating methodology developed by the ministry of power was highlighted. In this methodology all utilities will be rated on the basis of their performance and their ability to sustain commercially viable operations in the long run. The methodology focuses on rewarding efforts of distribution utilities and therefore stimulating and improving operational and financial performance of distribution entities. One of the criteria for ranking of the distribution companies will also be the level of their Renewable Purchase Obligation fulfillment. A system of negative marks has also been introduced in the rating methodology. The first ranking expected to be issued in March 2013.

This integrated rating methodology is expected to facilitate realistic assessment by Banks/FIs of the risks associated with lending exposures to various state distribution utilities. It would enable funding with appropriate loan covenants for improving operational, financial and managerial performance.

For Ex: Gujarat has improved its position by ICRA & CRISIL ratings because of improved performance in optimization of power purchase costs, overall improvement in operational efficiency, savings in interest costs because of debt restructuring and significant improvement in cash collections. Whereas utilities in States which have lower ranking like MP, UP & Tamil Nadu will have no proper debt restructuring & unbundling, no proper power purchase costs etc.
Therefore, financial institutions or investors will decide in which state to locate their projects based on the rankings similarly in the case of banks, as they will choose to finance or provide loans to those utilities which have a good ranking and a proper debt structuring.

Contributed by Chetan Adhikari

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