Payment delays have been identified as one of the most significant investment risks in the electricity sector, making lenders wary of lending against money owed by discoms. Research suggests that discom counterparty risk adds an estimated 10 per cent to the cost of solar debt.
With India’s energy needs and clean energy targets growing, solving discom payment risk is essential to keep capital flowing into the sector. Reforming discoms remains the real solution, but until more state governments find the will to take that on, a better-designed payment security fund could fill the gap.
Existing mechanisms
An electricity distribution company (discom) sources its power from generators through power purchase agreements. These agreements are only as good as the discom’s ability to pay generators on time. The Ministry of Power has required discoms to provide a letter of credit (LC) to generators since 2019 and has made recovery automatic where the LC is not drawn upon or not maintained through the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. Both are designed so that a missed payment is addressed quickly, without the generator having to approach the regulator.
In theory, this is how it is supposed to work. When a discom misses a payment, the generator can first draw on the letter of credit to recover the unpaid bill. The discom also owes a late payment surcharge, which is interest charged on the unpaid amount for every day it remains unpaid after the due date. If the default continues to the trigger date, roughly two and a half months from billing, the discom is barred from buying power on the exchange, and the generator can sell 25 per cent of the contracted power elsewhere. If the default continues for another thirty days, or no LC was opened at all, the generator can sell all of the contracted power on the exchange.
The discom’s long- and medium-term access to the inter-state transmission system is also cut by ten per cent, and by a further ten per cent for each month of default, until the dues are cleared. The only exception to the automatic application of these rules is where the billing amount itself is disputed by the discom, in which case the matter can go to the appropriate State Electricity Regulatory Commission for adjudication.
In addition to a mandatory LC and the LPSC rules, the Ministry of Power has also created the PRAAPTI portal (Payment Ratification and Analysis in Power Procurement for Bringing Transparency in Invoicing of Generators), which was launched in 2018 and publishes the dues that discoms owe to generators, including overdue amounts. The PRAAPTI portal shows how much discoms owe, but not whether the letters of credit meant to prevent those dues were ever opened, maintained or drawn upon.
How well have they worked?
Have the two rules deterred further defaults and made the recovery of dues faster?
The Rules set out a post-default process that should not involve the State Electricity Regulatory Commission at all. We looked at the Maharashtra Electricity Regulatory Commission’s (MERC) orders on late payment disputes against the state discom, Maharashtra State Electricity Distribution Company Limited (MSEDCL). We chose MSEDCL because Maharashtra is one of India’s largest and most important electricity markets, and its discom is among the biggest buyers of renewable power. If the safeguards are not working there, it is possible that they do not work much better in other states.
In the last three years, eight petitions have gone before MERC against MSEDCL over defaults stretching back as far as 2013. In the cases we reviewed, the litigated delays ranged from two years to 10.5 years, and the amounts MERC finally determined totalled about Rs 23.86 crore. All of these cases involved invoices and surcharge amounts that were disputed by discoms to prevent automatic encashment of letters of credit, but the discoms eventually lost these disputes.
Two orders are particularly instructive. In one case, the developer sent MSEDCL 35 separate request letters over four and a half years, from August 2020 to February 2025, before filing its petition. Its earliest disputed invoice, raised in July 2020, fell due on 16 October 2020 and was eventually paid on 3 December 2021, 413 days later.
Under the trigger-date provisions of the Rules, a default like this should have activated supply regulation or LC encashment within about ten weeks. MERC issued its final order on 20 July 2026, nearly six years after the earliest default, and at no point in the order does either party record that the LC was invoked in the meantime.
The second matter is more telling because the default came after the 2022 Rules were notified. An April 2022 invoice fell due on 8 July 2022. The parties could not agree on the amount, and the dispute was resolved only after MERC directed MSEDCL to submit reconciled computations, by an order dated 6 August 2026. That was four years after the due date, even though the Rules put the trigger date at about two and a half months from billing. The order does not record the LC being drawn at any stage.
Every one of these orders follows the same sequence. We see years of non-payment followed by a petition to the regulator. The regulatory commission then spends months working through limitation law and computation before it fixes what is owed. Only then does the order point to the Rules, and only as a future remedy: pay this now, or the generator may use the Rules to recover it. In these orders, discoms freely dispute the billing amount or the surcharge amount to prolong payment delays.
The importance of a payment security fund
The Rules may have improved payment performance, with the eight orders we studied being exceptions in which defaults ran for years and generators had to rely on Maharashtra Electricity Regulatory Commission to get payments flowing. That said, even eight cases in which developers could not recover dues without litigation may be enough to increase the cost of investment. It is also worth noting that suing a discom is not a simple decision because the developer is tied to it by a PPA that runs for decades. In a market where there are only a few state-owned buyers, the continuity of the relationship becomes important, and a lot depends on how a developer sees its long-term relationship with the state.
One way out has been to route procurement through the Solar Energy Corporation of India (SECI), a central public sector company that signs power purchase agreements with generators and resells the power to discoms, so that the generator’s counterparty is a creditworthy central entity. This comes at a cost, since discoms lose control over what they buy and when, and in a federal structure in which electricity is a concurrent subject, a sector cannot be built on a centralised fund or intermediary.
One remedy already under discussion is to move away from the letter of credit and use an adequately sized fund as the payment security mechanism. Today, every LC is set at a flat multiple of monthly billing, regardless of the financial health of the discom on the other end of the contract. A fund sized to a discom’s fiscal health (its collection efficiency, its aggregate technical and commercial losses, and its payment history) would not depend on the discom opening or renewing an instrument. It would also put the cost of protection on the discoms least likely to pay, rather than imposing it equally on every contract.
A payment security fund carries its own risk of moral hazard: if discoms know a fund will pay generators on their behalf, they have less reason to pay on time. The fund would need safeguards built in, such as contributions from the discom, limits to the number of drawdowns in a year, or reduced eligibility for central schemes and grants for the power sector for repeated use.
India’s solar additions remain strong, and that is worth acknowledging. The question is not whether capital is flowing, but how much more cheaply and quickly it would flow if payment security worked as designed.
Renuka V Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering.
Subodh Singh is a research fellow at TrustBridge
Views are personal.
(Edited by Prashant Dixit)