The Indian power sector has witnessed many achievements in recent times. In a huge push, each and every village in the country stands electrified today, a truly landmark achievement. Under the Saubhagya scheme, power to all rural households and poor urban households is envisaged, with just 6.5 lakh targeted households remaining to be electrified. Power supply has improved and energy deficit has reduced substantially from a negative 4.2% in 2013-14 to just 0.6% in April-October 2018-19. The UDAY scheme, launched to safeguard the distribution companies (discoms), led to significant reduction in losses and an increase in their energy billing by 9% in 2017.

The most notable turnaround in the power sector has been the strong impetus to renewable energy (RE) with an ambitious capacity target of 175 GW by 2022. Today, RE accounts for as much as a fifth of total capacity with a doubling of the sector from 35 GW to 70 GW between FY14 and FY18. To ensure continued progress in the power sector, private investments can be built up through a beneficial policy ecosystem. The industry faces challenges relating to power purchase agreements, delayed payments, dispute resolution and pricing issues.Coal shortage is a recurring issue in the absence of power purchase agreements (PPAs). States are reluctant to enter into long term PPAs due to price fluctuations as pass-through for increased costs on purchase of coal is pending. Lack of sustainable coal linkages lead to increased risks of projects, making them financially unviable. As short-term coal linkage is not permitted, this leads to tariffs as high as `12 per kilowatt 

hour, increasing consumer burden. Permitting short-term coal linkages for PPAs and removal of restrictions in allotment of coal to merchant power plants would help stressed plants to meet their debt obligations. To tackle the issue of high tariffs, a provision could be made in the amendments to the tariff policy.

The second issue is of delayed payments by discoms to generating companies, often going up to 7-8 months. This has significantly affected the conventional power sector, making companies unable to service their bank debts. Despite pressure on states for ensuring timely payments, the reform pace is slow.

Due to the severe liquidity crunch, power companies are unable to expand investments or participate in new projects. In addition, delays in revenue also put pressure on lending banks as investors cannot service loans, affecting bank performance. By May 2018, total unpaid dues by discoms to 23 power producers stood at `44,195 crore. An institutional arrangement may be considered through which investors can be protected from uncertainties over such delayed payments. “Bill discounting” should be introduced, which a bank or financial institution such as Rural Electrification Corporation (REC) or Power Finance Corporation (PFC) takes from a seller to release funds before the credit period ends. The power company’s bill will then be presented to the discom and the full amount will be collected. This would enable liquidity and timely release of funds to investing companies. This mechanism can be supported by the state governments and the central government could step in if PFC and RFC are not paid.

Three, substantial amounts of money are stuck in several stages of arbitration and litigation. Arbitration proceedings take several years for resolution, adding to the woes of the power companies. Disputes and resolutions cost both time and money, while lenders turn averse to companies involved in litigation. In 2015, the Cabinet decided that 75% of the disputed amount could be paid to construction companies, if adjudication is in their favor. This decision could be extended to the power sector as well. A bank guarantee could be provided by the private company on the amount, so that liquidity and cash flow are not held up in courts.
Four, in the renewable energy sector, low tariff caps in tenders offered by central and state governments are discouraging bidders from participating. RE companies are facing higher costs from interest rates, currency volatility and import duties, and caps on tariffs reduce their risk appetite. Several bids have been cancelled recently, impacting investor confidence.

In this context, industry recommends that tariff caps be removed as soon as the market picks up. To enable more realistic caps, an open and transparent mechanism in the interim is recommended, through which consultations can take place with the industry before a cap is fixed for a certain project.