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Weekly Update: Power tariffs set to rise as the debt restructuring process for states gets underway

Weekly Update: Power tariffs set to rise as the debt restructuring process for states gets underway

As a part of the central government’s debt restructuring process, four states – Haryana, Uttar Pradesh, Rajasthan and Tamil Nadu – have begun the process of taking over their short term liabilities from the respective power distribution companies (refer). According to the approved scheme, 50% of the liabilities would be taken over by the state governments. This would be converted into bonds issued by the Discoms (power distribution companies) and backed by a state guarantee.

  • As a part of debt restructuring process, the central government will provide Transitional Finance Mechanism for liquidity support
  • Solar power is becoming increasingly competitive across many states for commercial and industrial consumers
  • Market participants now view the subsidy mechanism as a roadblock more than an incentive

The central government will provide the Transitional Finance Mechanism (TFM) for liquidity support and a capital reimbursement support of 25% of the principal amount if all terms are met. As per the requirements, these Discoms will need to become financially sound in a time bound manner, primarily by raising tariffs. For example, Tamil Nadu has already raised power tariffs by 37% last year (refer) and Uttar Pradesh by 40% (refer) this year.

Apart from these four states, Andhra Pradesh, Jharkhand and Bihar have also been given an extension to join the scheme (refer), taking the total tally of states to seven. Rising tariffs in these states will bring them at par with other states that have already raised tariffs. Bihar, for example, has now proposed to increase the electricity tariff by 55% for all categories of consumers in the next financial year (refer).

Given the unsustainable losses and debt of most state power distribution companies, the central Ministry of Power hopes that the State Electricity Distribution Management Responsibility Bill, 2013, will be tabled in the winter session (beginning 5th December 2013). This bill is expected to force state electricity distribution companies to revise tariffs more frequently (refer). Furthermore, after the ongoing state elections in four Indian states and national elections in May 2014, power tariffs are expected to rise across the board.

In a high power tariff regime in India, solar power is becoming increasingly competitive across many states of India. This is especially true for the commercial and industrial consumers who end up subsidizing tariffs for rural and small urban consumers. Commercial consumers in four Indian states – Maharashtra, Andhra Pradesh, Kerala and Delhi – have already achieved parity with solar power. Many more Indian states are expected to join this list in the next one year. In our latest product, the India Solar Navigator (click hereto download), BRIDGE TO INDIA has carried out an analysis that predicts which states are expected to be favorable for adoption of solar power over the next five year.

As a part of the overall analysis, we have looked at the future trend for power prices based on factors such as losses of distribution companies and their debt-restructuring plans.

Regulations to increase the adoption of solar power are also on the anvil. Pondicherry has successfully piloted net-metering in India. Tamil Nadu and Andhra Pradesh have notified their net-metering policies. Punjab, Delhi, Kerala and Chandigarh are expected to adopt net-metering soon.

According to BRIDGE TO INDIA research, around 120 MW of rooftop solar has already been installed in India. The rooftop market saw a slowdown in the last eight months because of the unavailability of MNRE’s subsidy funds. Now, many market participants view the subsidy mechanism as a roadblock more than an incentive. The subsidy overhang is coming to an end and EPC companies are known to be finalizing orders for installations without subsidies. Many companies and solar specific task forces in trade associations have also been voicing their opinion to completely do away with the subsidy mechanism as it is doing more harm than good in its current form. Parity based adoption of rooftop solar in India will be spread out across states and consumer types. With rising tariffs of conventional power and favorable regulations, the adoption for solar will pick up pace.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE. Sign up to our mailing list to receive these updates every week.

You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.

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