Centre approves payment security mechanism for Discoms

In a big relief to the stressed power sector, the government on Friday approved the proposal for the implementation of a payment security mechanism for the purchase of electricity by distribution companies from generating firms.

The power ministry has made it mandatory for discoms to open and maintain an adequate letter of credit (LC) as payment security mechanism under power purchase agreements (PPAs) for buying electricity from generating firms from August 1, 2019.

"R K Singh, Union Minister of State for Power and New & Renewable Energy (IC) and Skill Development & Entrepreneurship, in a major decision has approved the proposal to make it mandatory for distribution licensees to open and maintain adequate letter of credit as payment security mechanism under power purchase agreements," a power ministry statement said.

The independent power producers have been demanding to put place a payment security mechanism to reduce stress in the sector. The high-level committee headed by Cabinet Secretary P K Sinha also recommends putting in place a payment security mechanism for generating firms.

On the decision, Singh said in the statement, "This will change the system and the sector will become viable."

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The PPAs have the provision regarding maintenance of adequate payment security mechanism mainly in the form of letters of credit by the distribution licensees/ procurers of power. A robust payment security system requires adequacy and validity of the letter of credit to cover the payments due on account of drawal of power, it said.

The statement further said the Electricity Act 2003 provides that the regional load despatch Centre shall be responsible for optimum scheduling and despatch of electricity within the region, in accordance with the contracts entered into with the licensees or the generating companies operating in the region.

The state load despatch centre shall be responsible for optimum scheduling and despatch of electricity within a state, in accordance with the contracts entered into with the licensees or the generating companies operating in that state.