Policy measures on power to reduce cost burden on discoms

The recent policy measures announced by the Centre including flexible utilisation of domestic coal linkage and procurement of short term power through reverse auction are favourable for the state discoms as it is likely to reduce the cost of power purchase, says ICRA.
According to the rating agency, flexible utilisation of coal linkages by state owned or central owned generation utilities would result in an optimal utilisation of the linkage coal from mines and help lower the transportation cost of domestic coal.
"Also, distribution utilities will benefit from competitive & transparent price discovery in the reverse auction based electronic platform for procurement of short term traded power," ICRA Ratings Senior Vice President Sabyasachi Majumdar said in a statement.

He said the continued improvement in domestic coal availability is positive for the sector, given that it has substantially mitigated both coal supply risk and the risk of under-recovery in fuel cost (due to dependence on costlier coal imports) for projects with competitively bid tariffs and having fuel supply agreement with Coal India.
Majumdar, however, said that some of these cost savings could be offset by the upward revision in domestic coal prices by CIL in May 2016 which is expected to increase the cost of power generation by 9-10 paisa/unit for coal based IPPs much of which is likely to be passed onto discoms.

"Thus, timely pass-through by way of fuel and power purchase cost adjustment framework by state owned discoms remains important from their cash flow perspective," he said.

According to the rating agency, only 16 out of 29 states have issued tariff orders for FY 2017 and that some of the states which haven't issued tariff orders include states with highly financially challenged utilities such as Tamil Nadu, Uttar Pradesh and Rajasthan.
He further said that timely implementation of Ujwal Discom Assurance Yojana (UDAY) by discoms in other states as 13 states have signed tri-partite agreements out of the 20, which have given in-principle approval so far, remain critical for sustained improvement in the financial position of the discoms.

"For discoms such as for Bihar, Haryana, Jammu & Kashmir, Rajasthan and Uttar Pradesh which have signed MoUs and are dependent upon substantial funding support from their respective state governments, their ability to improve the operational efficiencies in line with targets as well as timeliness in release of such funds by state governments would remain extremely important," Majumdar added.