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16 states on board for renewing payment security mechanism with NTPC

13 April, 2016

India seems to have partly resolved the payment security conundrum that was bogging state-run utilities such as NTPC Ltd.

With tripartite agreements (TPAs) between the Reserve Bank of India (RBI), the state governments and the Union government set to lapse in October 2016, India’s largest power generation utility was worried about payment defaults by states. According to data available with the ministry of power, the outstanding debt and losses of distribution companies are at Rs4.3 trillion and Rs3.8 trillion, respectively.

The issue seems to be resolving with 16 states now being in favour of extending the TPAs which would act as an instrument against payment default by the state electricity boards (SEBs). The TPAs guarantee that in the event of any payment default by the SEBs, the amount will be deducted from the centre’s devolution to the states.

Also, RBI has given its no-objection certificate (NOC) to the TPAs and the Union finance ministry’s consent is awaited. The agreement holds importance with the utility being the largest supplier of electricity to states.

“The issue is with the finance ministry now. Sixteen states have given their consent about extending the tripartite agreements. While RBI has given its NOC, the finance ministry has to give its consent. NTPC had requested the power ministry to help in the renewal of the agreements. Once the finance ministry gives its approval, this will come through,” said a government official requesting anonymity.

A senior NTPC executive, who also didn’t want to be identified, confirmed the development and said, “Sixteen states are on board with more likely to join.”

The TPAs were put in place after a committee headed by Montek Singh Ahluwalia had recommended so to protect central utilities such as NTPC.

With NTPC been tasked to meet a quarter of government’s 100 gigawatts solar target, the TPAs will help in providing payment security. The utility has a present installed capacity of 46,653 MW and a 16% share in the country’s total installed capacity of 288,665 MW. The utility plans to have projects with a total capacity of 128,000 MW by 2032.

Queries emailed to the spokespersons of the ministries of finance, power, RBI and NTPC remained unanswered.

Experts believe that overall the development is good for the sector as a whole as it will provide security to the power producers.

“The tripartite agreement will also go a long way in providing security for future revenues,” said Abhishek Poddar, partner, A.T. Kearney Ltd.

With the Bharatiya Janata Party-led government projecting a gross domestic product growth of 7-7.75 per cent for the current financial year, electricity generation and access will play an important role given its requirement for manufacturing and the associated multiplier effect.

However, there is a weak electricity demand in the country, given the financial position of the SEBs. To help revive demand by improving the financial position of the SEBs, the government launched a bailout plan—Ujwal Discom Assurance Yojna, or UDAY. Under the scheme, states take over the distribution companies’ (discoms) debts thereby creating fiscal space for the discoms to purchase electricity.

Analysts though believe that the worst is far from over.

“The power sector however continues to face challenges arising out of weak demand from state utilities (leading to absence of fresh signing of long-term PPAs, or power purchase agreements), slow progress in resolution of tariff compensation issues for the affected thermal IPPs (independent power producers) and uncertainty on improvement in domestic gas availability,” wrote ratings agency Icra Ltd in a 7 April report.

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16 states on board for renewing payment security mechanism with NTPC

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