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Budget | January 2017

Keep off vote bank interests from discoms | IPPAI

Improving the financial state and efficiency of distribution companies´ (Discoms) operations, allowing for renegotiation of Power Purchase Agreements (PPAs), delinking of coal from PPAs, and reducing risk for banks and ensuring implementation of open access, formed part of the top five broad suggestions made by Independent Power Producers Association of India (IPPAI) in its pre-Union Budget 20017-18 memorandum submitted to the Finance Ministry. It has also recommended some radical reforms for bringing the power sector out of current crisis.

As a first step to unleash the potential of the discoms to become efficient and to function in a market economy, discoms should cater to the interests of the consumer and not the interests of the vote bank or of vested interest groups in the discom itself, IPPAI said. It has also recommended that discoms be required to reduce the manpower which has accumulated over several years since. The generators´ trade body has also highlighted that at present, there is no incentive for discoms to reduce their manpower costs as they run on a ´Cost Plus´ tariff regime.

Using smart meters that adapt internet of things (IoT) technologies will help derive twin benefits of reduction in overheads and wage bills on one hand and increasing efficiency on the other, IPPAI said.

The trade body for the power generators suggested that the legacy contracts that have been signed by the discoms in the form of PPAs need to be renegotiated, and in some cases, exited, especially given the changing parameters of demand and supply, and consumer affordability, as well as the health of the discoms. This has been reinforced by the recent Supreme Court judgment of July 5, 2016 in the matter of GUVNL versus Tarini Infrastructure.

To help improve power sector operations and de-stress the banking system, IPPAI suggested doing away with the system of linking coal supply to long-term PPAs. It has cited that this lopsided policy was resulting in a large number of stranded assets and Non-Performing Assets (NPAs) in the power sector.

To reduce banks´ non-performing assets (NPAs), power projects should be termed as ´national assets´ instead of private concerns, IPPAI said, while adding that open access system should be allowed for generators in choosing the discom of their choice based on the latter´s financial health.

´Further, it would also enable the risk to be diluted as each generator could supply to multiple consumers across sectors, reducing the risk rating further, and enable generation companies to bounce back without having to depend upon a particular discom which could be going through financial stress at that point in time,´ IPPAI said. Open access in distribution segment will increase competitiveness and bring down power costs as well, it added. In fact, it will aid the Prime Minister´s Make in India programme and improve the ´ease of doing business´ factor in the country, it explained.

Financing of discoms should not be allowed unless they reduce their own overheads by at least 20 per cent per annum for the next three years. ´Discoms must bring down their Cost-to-Serve by 50 per cent if they are to ensure a reduction in consumer electricity prices so that the economy can be revived,´ the power generators´ body argued. It has also suggested development of a debt derivatives market by removal of stamp duty and other charges for widening funding options. It has also emphasized the need for elimination of cross-subsidies, which are making the manufacturing activity unviable. It has warned that it will eventually result in a reduction in consumption by industries and other commercial consumers (who are currently cross-subsidizing the agricultural and other consumers).

- BS Srinivasalu Reddy

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