Will power discoms ever become “Aatmanirbhar” or self-reliant?

Economic Times, May 29, 2020

By Udai S Mehta, Sarthak Shukla, and Ananya Saroha

Thus, self-reliance or “Atmanirbharta” for power distribution sector in India needs to be explored in a strategic manner if financial sustainability of discoms is to be achieved.

Distribution companies or Discoms, often cited as the weakest link in the Indian power sector, have been the focal point of power sector reforms for decades now. The fact that the Prime Minister in a recent review meeting of Ministry of Power and Ministry of New and Renewable Energy highlighted that focus needs to be on de-stressing discoms, points towards a systemic persistent problem in the distribution sector in India.

There have been many attempts by the government from time to time for financially overhauling the distribution companies, or discoms. The flagship scheme of UDAY launched in 2015 was a leap forward in this regards. As happened with earlier financial packages, the stimulus provided by UDAY also failed to make a difference as discom debts and outstanding dues have reached pre-UDAY levels in 2020.

To further add to the discoms’ financial woes, the nationwide lockdown aggravated the situation with electricity consumption falling steeply, particularly for commercial and industrial (C&I) consumers. With almost two months into the lockdown and discoms are already wheezing like a Corona Virus patient.

According to a report by ICRA, there will be a 20-25% decline in demand for electricity year on year during the lockdown period mostly due to C&I consumers and bulk supply to railways, public transportation, among others. As of 31 st March 2020 the discoms owned total overdue amount of Rs 92,707 crore and outstanding amount of Rs 11,986 crore. This is almost 40% more compared to the same time last year.

While the full picture will only be visible after the data for the months of April and May, 2020 emerges the above numbers do tell a grim story. The stalled bill collections for the months of March and April, 2020 have increased the strains on the discoms.

But this is not the end of the discoms’ problems, years of cross subsidization has steered bigger industrial users towards self-sufficiency in power causing major loss of revenue to the sector. In other words, the system of payment in power sector in India right now depends on the commercial and industrial users paying higher tariff, subsidizing the cost that was to be paid by the agricultural and domestic consumers.

Further, as the high paying consumers are opting for open access and captive generation for reducing their power bills, the discoms balance sheets are poised to take a hit. Inevitably, stressed discoms also feed into a stressed power sector as discoms often failto paythe generation and transmission companies (gencos and transcos), who are the unable to pay the suppliers of fuel. This increases the risk of existing loans becoming NPAs.

So far, many steps have been taken in the wake of Covid-19 to address the financial woes of discoms. These include reduction of late payment surcharge, which is payable at 1.5% per month by the discoms on non-payment to generation and transmission companies, to 1% per month until 30 th June 2020. In addition to this, the stimulus package announced by Finance Minister earmarked Rs 90,000/-crore for injecting into the power discoms for enhancing liquidity and clearance of their outstanding dues.

Also, there’s a provision of centre-guaranteed loans to discoms through the state-owned power finance companies such as PFC and REC to the discoms subject to conditions like introduction of digital payments for consumers, liquidation of state government’s dues towards distributors, and reduction in financial and technical losses on account of electricity supply. But these loans are at a high risk of getting converted to NPAs, if structural issues of the sector are not addressed.

These measures though ensure that the power sector does not collapse in the short term, do nothing to address the imbalance of payment that has been deepened by the lockdown. If one wants look for solutions for actual “Aatmanirbharta” of discoms, there is a pressing need to identify conditions under which certain reforms could yield positive results. These reforms are in the pipeline either at policy thinking levels or in draft legislations. These include:

  1. Separation of carriage and content which implies that wires business and supply business under distribution utilities should be segregated for better operations.
  2. Division of distribution area into sub areas according to consumer base and introducing franchise or sub-license models.
  3. Creation of separate accounts for receivables from government departments, which is either budgeted and paid upfront or directly cut from the state’s share from central pool so that revenue from government agencies is ensured to the discoms
  4. Incentivising performance through separate tariffs for separate distribution companies. This would allow public and state pressure to push discoms to become more efficient, thus providing cheap power.
  5. Optimising regulatory assets and adopting an approach similar to a ‘bad bank’ for resolving pending finances with the discoms, so as to make then financially sound.

Power sector reforms, as highlighted by the PM in the review meeting, cannot followthe one-size-fits-all approach. Hence, experimental pilots need to be carried out to assess the parameters in which a particular reform measure yields the desired objectives, similar to the regulatory sandboxing technique elucidated by the RBI for banking sector.

Thus, self-reliance or “Atmanirbharta” for power distribution sector in India needs to be explored in a strategic manner if financial sustainability of discoms is to be achieved.

[This piece was authored by Udai Mehta, Deputy Executive Director, Sarthak Shukla, Assistant Policy Analyst and Ananya Saroha, Research Associate at CUTS International]

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