Demonetization has been chaotic and changing
the way the Indian economy functions. For the power sector, demonetization has
turned out to be a positive event with distribution companies (DISCOMs)
recovering pending power bills from their customers and banks suddenly flush
with funds, all of which could relax lending to the power sector and potentially
bring down interest rates.
The government has mandated that the old notes
of Rs.500 and Rs.1000 denominations can be used by the citizens to pay
pending utility bills which will help DISCOMs due to their huge backlog of unpaid
bills. DISCOMs are expecting a substantial influx of payments prior to the December
31 deadline after which these currency notes will become invalid. For cash-strapped
DISCOMs this is unexpected good news.
An official at Maharashtra State Electricity
Distribution Company Limited (MSEDCL) stated, “since the announcement of
demonetization, DISCOMs in the state have seen payments of old bills cross Rs. 1
billion ($14.74 million) within a week. The signs are positive as this will
financially empower the DISCOMs.”
Due to the amnesty of taxes and penalties
provided to black money holders (unaccounted currency), the government will have
a huge influx of money that can be allocated for infrastructural development
and funding new projects, stated an official at Transmission Corporation of
Telangana Limited (TCTL).
An official at the Ministry of New and
Renewable Energy (MNRE) said, “India is largely a cash economy so in the
short-term demonetization is going to hurt installations as small developers
will find it tough to pay for land acquisition, but, in the long-term it will
be beneficial as DISCOMs will get paid, lending rates will fall and foreign
investment will increase in the face of a falling rupee and rising dollar.”
There are many ambitious projects like the Green Energy Transmission Corridor that require large investments. With consumers repaying pending
bills and government taxing defaulters, nodal agencies foresee better fund
allotment from the government in the future, commented an official at Bihar
State Power Holding Company Limited (BSPHCL).
Officials at Jharkhand Renewable Energy
Development Agency (JREDA), Odisha Power Transmission Corporation Limited
(OPTCL) and Power Management Company, Madhya Pradesh, all concurred: due to
demonetization, peace is being restored in regions like Jammu & Kashmir,
and Jharkhand, Madhya Pradesh, Odisha, Andhra Pradesh [insurgency belt] as insurgents
find it hard to fund their operations. This will uplift the morale of
developers in these regions and installations will pick up.
Tamil Nadu Generation and Distribution
Corporation (TANGEDCO) received tepid response for its 500 MW tender due to
demonetization, but it was an exception said an official at MNRE.
An official at Uttar Pradesh Power
Transmission Corporation (UPPTCL) stated that the state has been a classic
example for unpaid electricity bills. Now the DISCOMs can get some relief with
consumers using their stashed cash to pay pending bills as well as advance payment
for future month’s electricity bills in some cases.
A slew of government funded projects and
subsidies are expected as cash deposits increase in banks, an official at the Rajasthan
Renewable Energy Corporation commented.
The lending community is cautious and feels
that it is too early to predict if all this money that is flowing into the
banks right now is here to stay. There is a possibility that the funds
deposited could be withdrawn after December 2016. But, on the flip side they
are also aware of the fact that they cannot have a situation where the deposits
and cash balances are much higher than lending, leading to “negative carry” (a
situation in which the income earned from a loan is less than the bank’s cost
Developers whom we spoke to and who have won
bids recently are concerned about payments to construction workers, on-time
work completion and the availability of cash to take care of such expenses. However,
they are also hoping to see reduction in lending rates that would help bring
down the project cost and in turn boost their project IRRs.
“Demonetization, though chaotic, is turning
out to be an overall positive event for the renewable sector in the long run.
This combined with the rapid decline in solar component costs is making a lot
of low questionable bids feasible. However, we have to wait and see how
government agencies handle the situation - especially payment issues - going
forward,” commented Raj Prabhu, CEO of Mercom Capital Group.