Power is a fundamental component of infrastructure, essential for a country’s economic growth and welfare. The availability and development of suitable infrastructure is critical for India’s economy to continue to thrive. India’s power sector is one of the world’s most diverse. The country’s electricity demand has risen significantly and is likely to continue to rise in the coming years. Massive additions to installed producing capacity are needed to meet the country’s growing demand for power. With the enactment of the Electricity Act, 2003, there has been tremendous growth in the Indian power sector. However, despite the growth, there has also been an increase in stress in the sector. The article focuses on the impact of a few government initiatives such as Shakti, Uday and Pilot Schemes besides the Insolvency and Bankruptcy Code, 2006 and provides suggestions to reduce stress in the sector.
Electricity, being a subject falling under the Concurrent List of the Indian Constitution, empowers both the Parliament and the state legislatures to legislate on issues surrounding it.  However, when it comes to the issue of distribution and supply of power to both rural and urban areas, the responsibility lies with the states. 
Coal remains the single largest source of energy for electricity production in India, followed by hydro, nuclear and renewable energy.  Wind and solar power contribute to approximately 83% of the total renewable energy. The Electricity Act, 2003 enabled an open and competitive system in the power sector inter alia by introducing several policy features such as aiding competition through open access, de-licensing generation, creation of regulatory bodies, establishing Renewable Purchase Obligations etc. Upon the enactment of the Electricity Act, 2003, the power sector has seen tremendous growth in terms of capacity addition in India. It has put India as the third-largest producer of electricity besides being the third-largest consumer of energy. 
Reasons for stress in the Power Sector
Increase in stress in the sector has largely been attributed to an increase in capacity without active Power Purchase Agreements (“PPAs”) with distribution companies (“Discoms”). Additionally, the cancellation of 204 coal mines allocated to various parties by the Supreme Court in Manohar Lal Sharma v. The Principal Secretary and Ors.  and issues relating to the supply of coal contributed significantly to stress in the power sector. These resulted in several power projects being stranded without the arrangement of adequate fuel supply. The situation has worsened due to the slow growth rate in power demand over the last decade.
Power projects require a lot of capital and usually have a long gestation period.  On several occasions, the projects are not completed on time and result in cost overruns. Such events typically occur on account of delays in receipt of clearances, land acquisition and financial closure. State policies regulating the fuel cost pass-through, mega power policy, competitive-bidding guidelines are not in accordance with the Electricity Act, 2003 and the National Electricity Policy (“NEP”). 
A dip in electricity demand of around 20-25% was seen during the COVID-19 induced lockdown. The demand has slowly started to recover, although it has been reported that the lockdown has resulted in an estimated INR 50,000 Cr. liquidity crunch in the entire sector. 
The Government of India has taken various steps to address the stress in the sector. These include measures such as Shakti, UDAY and the Pilot schemes. With the enactment of the Insolvency and Bankruptcy Code, 2016 (“the Code”), the Union Government provided an opportunity to the stressed entities as well as the creditors to try and resolve such entities.
The Scheme for Harnessing and Allocating Koyala Transparently in India (“Shakti”) was launched with the aim of reducing dependence on imported coal. The companies which did not have coal linkages in the past were to benefit from the new policy as they would get domestic fuel supplies at competitive rates through auction. The Ministry of Power has released the methodology for allocation of coal for sale of power through the short-term and day-ahead market (“DAM”) in power exchanges. 
The methodology provides that within 45 days, the coal companies, CIL and SCCL, will earmark areas and mines within their subsidiaries that will be allocated for use as per these guidelines and publish the same on their websites indicating the quality of coal (gross calorific value/grade), the quantum of coal available, the period for which such coal shall be made available and the schedule for the start of supply of coal. 
The Ujwal Discom Assurance Yojna (“UDAY”) was launched by the Union Government to improve the poor financial situation of these companies by launching the UDAY Scheme. The long term vision of this scheme was to ensure an uninterrupted supply of electricity to the whole of India. Another major objective of UDAY was to find the right balance between revenue and cost for these companies to ensure smooth financial and operational activity.  The scheme helped reduce the combined financial losses of discoms from Rs 51,562 Crore in FY16 to Rs 15,132 Crore in FY18. However, Power Finance Corporation (“PFC”), the principal lender to these discoms, saw its combined losses increase to Rs 33,365 Crore in FY 2018.  Factors such as inadequate hikes in power tariffs, inadequate rise in ‘open access’ transactions and outstanding dues accumulating from state government departments have been cited as reasons by the Union Government for the discoms not meeting the UDAY targets. 
With the aim of reviving power demand, the Government launched a pilot scheme for procuring 2,500 MW of power on a competitive basis for three years from generators with commissioned projects without PPAs. The scheme assures a minimum off take of 55% of contracted capacity. The tariff will be fixed for three years without escalation. PFC’s arm, PFC Consulting is the nodal agency and PTC India is the aggregator for the scheme. 
Insolvency and Bankruptcy Code
The Code was enacted with the objective of reorganisation and insolvency resolution of corporate persons in a time-bound manner for maximisation of value of assets of such persons, promotion of entrepreneurship, ensuring availability of credit and balancing the interests of all the stakeholders. Moreover, it is to be noted that the Code mandates a certain course of action without making any distinction between sectors. As a result, the causes of financial stress in a particular sector are not given any importance under the Code. The resolution process, if completed successfully, results in a change of management of the corporate debtor and the new management starts with a clean slate on the basis of the approved resolution plan.  A successful resolution process ensures that the corporate debtor is up and running. It does not address the structural issues owing to which non-performing assets (“NPAs”) have accumulated in the power sector and hence, solutions arising from the Code remain temporary. In this section, we shall discuss a few instances wherein a timely intervention by the Supreme Court led to a much easier path towards the resolution of power companies under the Code.
Bhushan Power’s resolution under the Code
Bhushan Power and Steel Limited (“BPSL”) was among the 12 big NPA accounts referred to the Code by the Reserve Bank of India in 2017. It witnessed several rounds of litigation post-approval of JSW’s resolution plan by the National Company Law Tribunal (“NCLT”).  It was followed by the Enforcement Directorate attaching assets worth Rs. 4000 crores on account of criminal proceedings against the promoters under the Prevention of Money Laundering Act, 2002. Thereafter, the National Company Law Appellate Tribunal (“NCLAT”) also affirmed NCLT’s order approving the resolution plan.  The NCLAT granted immunity to JSW Steel from litigations of BPSL under Section 32A of Code and directed investigative agencies, including the Enforcement Directorate, not to seize assets of BPSL.
Subsequently, Section 32A of the Code was challenged before the Supreme Court in Manish Kumar v. Union of India.  The Supreme Court held that the “extinguishment of criminal liability of the corporate debtor is important to the new management to make a clean break with the past and start on a clean slate.”  This judgment has, in effect, paved the way forward for courts and tribunals to deal with the recurring question of the continuity of liability of a corporate debtor for past offences.
The Gujarat Urja case
Upon the admission of the Corporate Insolvency Resolution Process (“CIRP”) application against Astonfield Solar Gujarat Private Limited, Gujarat Urja Vikas Nigam Limited moved to terminate the PPA. It was argued that the commencement of the CIRP constituted an event of default under the PPA. The resolution professional approached the NCLT seeking a stay on termination of the PPA as the PPA was the sole contract of the corporate debtor and termination would affect the corporate debtor’s status as a going concern.
The court held that the going concern status of the corporate debtor would be compromised by the termination of its sole contract. As a result, in instances where termination of a particular contract is solely on the ground of admission of insolvency proceedings and the contract is central to the corporate debtor continuing as a going concern, the adjudicating authority shall invalidate such termination of contracts. 
The February 12 Circular
The ‘February 12, 2018 Circular’  superseded all the previous instructions of the RBI on the resolution of stressed assets. It required banks to implement a resolution plan within 180 days with the lenders being required to file an insolvency application in case of non-implementation. Therefore, it was a huge cause of concern for the sector as many power companies were likely to be introduced to the insolvency framework provided under the Code. However, the Supreme Court struck down the circular as two vital factors, i.e., authorisation of the Government and the general nature of the circular, which did not concern a “specific default”, were missing from the Circular.  The court also observed that Rs. 34,044 crores of the NPAs in the power sector were primarily due to government policy changes, failure to fulfil commitments by the Government, delayed regulatory response and non-payment of dues by discoms. 
The power sector continues to sustain massive financial losses owing to unsustainable cross-subsidies and a lack of political will among the governments to solve the problem. Lack of competition, economically ineffective tariff-setting processes and a lack of modern technology and infrastructure development add to these losses.  As discussed earlier, several reforms have been introduced by the Union and state governments to address the long-standing issues of the sector. Still, they are yet to make a significant difference. It is imperative that the Union and state governments provide the state-owned utilities with operational and financial autonomy.  Measures such as good corporate governance models, the use of independent directors and vigilant State Electricity Regulatory Commissions can help the state-owned utilities immensely. It is interesting to note that discoms with greater autonomy and higher quality corporate governance are more profitable.  Further, increasing competition in the distribution ecosystem will help in enabling retail choices for customers since discoms generally have a monopoly in this area. However, factors such as the size of the market, nature of demand and potential for growth are essential to determine the feasibility of competition.
There is an instant requirement of segregation of all the stressed plants which have realistic chances of survival and those which are under huge debts. Those plants which have a realistic chance of revival require more attention as any further further delay to resolve this might increase the stress multifolds within a short duration. This approach may help in timely resolution of these plants under the Code as these plants can be run as going concerns, and there would be higher chances of revival as opposed to liquidation. 
Discoms should optimise their power purchase by procuring from the markets as appropriate, and they should be rewarded for efficiency gains, as energy efficiency plays an important role in accelerating clean energy transitions and achieving global climate and sustainability goals. Considering the instances when the markets continue to provide low-cost power, discoms should not be allowed to sign new, expensive, long-term thermal PPAs. Dynamic tariffs, empowered by advanced metering and a smart grid can reduce power purchase costs and aid in managing peak loads.  The object of dynamic pricing is to bring changes in supply and demand over time and their impact on costs. Advanced metering enables gathering and transfer of energy usage information in near real-time. It makes two-way communications with customers possible and is the backbone of smart grids. Smart grids, being equipped with automation, communication and IT system help to monitor and control power flows in real time. Due to the complex structure of the Indian power sector, both the Union and state governments should maintain a flexible approach to address the issues in the sector.
About the Authors
Akhil Kumar is an associate with the Corporate and M&A team with Lakshmikumaran & Sridharan. He is a law graduate from The National University of Advanced Legal Studies, Kochi.
Lakshya Godara, a 2021 graduate from Amity Law School, is a long term intern with the Corporate and M&A team at L&S.
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Preferred Method of Citation
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