Rs 1.5 lakh Cr. Opportunity In Introducing Smart Meters : CRISIL

CRISIL rating shared recent data on the current status of smart meters installed by the government under India’s Smart Meter National Program (SMNP). The government planned to replace 25 crore  (250 million) conventional electricity meters with prepaid smart meters and upgrade power distribution infrastructure, including feeders and transformers.

The report mentioned an estimated capital expenditure of Rs 1.5 lakh crore, which is expected to be implemented over the next five fiscals. It’s expected to improve the operational and financial profile of distribution companies (discoms).

Further, the features of SMNP such as modularity in capex and escrow structure to regulate payments will lower risks associated with large projects, making them safer and bankable. This is likely to stimulate private sector participation and enhance the roll-out of smart meters.

SMNP aims to improve the billing and collection efficiencies of discoms and help monitor electricity demand and consumption on a real-time basis. It is estimated to reduce power theft and improve forecasting of demand and scheduling of supplies. Such an upgrade can also help reduce the distribution losses of discoms.

Under SMNP, each state discom divides the area under its control/ jurisdiction into circles and awards them to private concessionaires, which are then expected to undertake infrastructure upgradation by purchasing, implementing, and maintaining smart meters for 10 years. The contracts are awarded via open auction based on the annuity quoted per smart meter to be received over the concession period. Discoms is expected to pay the concessionaires from the monies collected from consumers. They will also receive a grant from the Centre for each smart meter installed.

Says, Ankit Hakhu, Director, CRISIL Ratings, “At an average price of ~Rs 6,000 per smart meter including ancillary costs, SMNP is expected to provide a Rs 1.5 lakh crore capex opportunity in India’s power distribution landscape. Since smart meters are prepaid, their roll-out will improve the collection efficiency of discoms. There will also be support in the form of grants of up to Rs 1,350 per smart meter3 from the Centre, which will improve the financial profile of discoms.”

To ensure a smooth rollout, smart meter project contracts have been standardized. They have features that enhance bankability by de-risking typical issues encountered during implementation. For example, features include modularity in capex, i.e., allowing the commissioning of projects for as low as 5% of their overall scope, which enables receipt of cash flows on a pro-rata basis. That reduces the intensity of risk during the implementation stage. Further, with projects likely to be funded majorly by debt, the modularity feature allows for the debt to be disbursed on a piecemeal basis aligned with the commissioning pace and thus backed by cash flows. This lowers the debt servicing risk.

Says Varun Marwaha, Associate Director, CRISIL Ratings, “Another notable innovation of the SMNP program is the requirement of a direct debit facility (DDF) under which all online payments from the consumers of discoms get deposited in the DDF account. From this account, annuity payments to the project’s bank account are prioritised. This reduces the risk of payment delays or non-payment from the discoms to projects, one of the key risks in the power sector.”

However, the program is not without challenges. Aggression in bidding and the resultant impact on the credit quality of projects bears watching. This is because lower cash flows against debt taken for financing capex can reduce expected debt service cushions and hence credit quality. Also, the Rs 1.5 lakh crore capex projection remains sensitive to aggression in bidding and pace of award to private concessionaires.