A tariff is only a promise until the distribution company pays

Every few months a central auction for solar or wind capacity in India closes at a tariff that makes the business pages. The winning number is reported to two decimal places, compared with the previous auction and treated as the measure of the deal. I have taken part in those auctions for more than a decade, and I still read the tariff with interest. But in my experience it is the second most important number in a power purchase agreement. The first is how long the buyer takes to pay.

This letter is about that first number, and about why I think boards of Indian power companies, and the investors and lenders who watch them, still give it too little weight.

Read the payment record before the tariff

A renewable plant in India sells almost all its output under a contract of twenty-five years at a fixed rupee tariff. The buyer is either a state distribution company or a central intermediary that buys from generators and resells to distribution companies under matching agreements. Either way, the money ultimately comes from the same place: the bills a state utility collects from its consumers, plus whatever subsidy its state government actually releases. Where an intermediary stands between us and the utility, our payment risk is lower, sometimes much lower, because the intermediary has its own balance sheet, its own payment security arrangements and a strong interest in paying generators promptly. The risk is reduced, not abolished.

At Tejovan we learnt this in the most direct way. In June 2022 two state utilities owed us ₹1,710 crore of bills more than sixty days overdue, and our receivables had reached 238 days of revenue. Both buyers had signed contracts that looked sound, with letters of credit and payment security clauses. Neither clause produced cash when the utility simply did not have it. Once you count the working capital, the cost of carrying debt and the covenant tests that slow payment puts at risk, a tariff of ₹4.10 per unit from a buyer that pays in eleven months can be worth less to a generator than ₹3.90 from one that pays in forty days. Few auction commentaries make that adjustment.

When I was a credit analyst in Mumbai in 2000, a senior colleague taught me to read a utility's payment history before its tariff schedule. I kept a file for each state utility, recording how quickly it had paid generators and lenders. The habit has outlasted the file. Our finance team now keeps a scorecard for each of the eleven buyers and intermediaries we sell to, built from their payment record with us, their published accounts and tariff filings, the subsidy their state has released against what it promised, and whether the letters of credit their contracts require are open and adequate. Published ratings of utilities inform it. They do not settle it.

What the 2022 rules changed, and what they did not

The Electricity (Late Payment Surcharge and Related Matters) Rules, which the Ministry of Power notified in June 2022, were the most important change to our receivables in my career. They allowed utilities to clear accumulated dues in monthly instalments, stopped further surcharge accruing on the frozen balance while instalments were paid, and linked a utility's continued access to power markets to paying its current bills on time. For us the effect was large. Both utilities that owed us paid every instalment, overdue dues fell to ₹180 crore by March 2026, and receivable days fell to 64.

I want to be careful about what those rules changed. They gave buyers a strong reason to pay current bills promptly, because losing access to power markets in a hot summer is a serious matter for a utility and for the state government behind it. They did not change the underlying finances of distribution companies: the gap between what supply costs and what tariffs and subsidies recover, the losses in their networks and the timing of state support. Those vary widely from state to state and from year to year. A discipline that holds while the penalty for default is severe may weaken if enforcement softens, or if a utility under pressure decides that one more late bill is worth the risk.

There is also an accounting point that matters to boards. Our contracts entitle us to surcharge on late payment, and some companies recognise it as income as it accrues. We recognise it only on receipt or on a settlement that makes collection near certain, because its timing and amount depend on a counterparty's decision. When we settled with the larger utility in 2022 and gave up ₹148 crore of disputed surcharge, we had nothing to reverse. A company that had booked the surcharge would have reported a loss on a transaction that improved its cash. That is a sign the income was never as solid as its accounts implied.

Three questions before the next bid

What, then, should a board ask? I would put three questions before any new long-term commitment to a buyer, and I put them to our own bid committee.

The first is what the buyer's actual payment record has been, with us or with other generators, over at least three years, and how it changed when the rules came in. A short record of good behaviour under a strong rule is evidence, but not yet evidence that will hold for twenty-five years.

The second is what share of the company's revenue would come from that buyer, or from utilities in the same state, if the bid succeeds. We now set an exposure limit for each buyer and intermediary, approved by our Risk Management Committee. It has kept us out of auctions we could have won, including one whose tariff was the most attractive we saw that year.

The third is what happens to the project's debt if the buyer pays in six months rather than one. If the answer is a covenant breach, the bid needs more equity, a larger debt service reserve or a different buyer. A tariff that works only if the buyer pays on time is a tariff priced for the best case.

None of this is an argument against selling power to state utilities. They are the market, and many of them have improved their payment discipline markedly since 2022. It is an argument for treating the buyer as part of the price. When I review a bid paper now, the tariff appears on the second page. The buyer's payment record is on the first.