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Govt has approved a major proposal to relieve stressed power discoms. What is it?

Discoms will now be required to open and maintain adequate letter of credit (LC) as payment security mechanism under power purchase agreements
New Delhi: In a major step aimed at relieving the stressed power sector, the government gave a nod to a proposal for the implementation of a payment security mechanism for purchase of electricity by distribution companies (discoms) from power generating firms. Discoms will now be required to open and maintain adequate letter of credit (LC) as payment security mechanism under power purchase agreements (PPAs) for buying electricity from generating firms from August 1. An official press release from the Ministry of Power said, “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 licencees to open and maintain adequate letter of credit as payment security mechanism under power purchase agreements.”

The move is the culmination of a long-standing demand

Independent power producers have long been demanding a payment security mechanism to reduce stress in the sector. The decision was taken by a high-level committee headed by Cabinet Secretary PK Sinha. The committee also recommended putting in place a payment security mechanism for power generating firms. Commenting on the decision, Singh said, “This will change the system and the sector will become viable.”

What are the provisions laid down by the govt?

“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 letter of credit to cover the payments due on account of drawal of power,” the statement said. While quoting the Electricity Act 2003, the statement said the Act 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,” the statement added.