Opinion From the Opinions Editor: Another bailout of discoms won’t change the situation. Usher in competition
Bring more players in distribution. It will help weed out inefficiencies in the system – in billing, collection, labour costs
State governments, however, also face the demand for cheaper power from industry. (File) Dear Indian Express Readers
There are certain realities that perhaps need to be accepted.
For instance, populist policies such as free electricity are unlikely to disappear from the political landscape. In fact, it is increasingly likely that more political parties and states will embrace these giveaways. There is also the inevitability of another bailout of power distribution companies. One can call it restructuring, but with total discom debt exceeding Rs 7.5 lakh crore, the question is when, not if.
It is also almost certain that discoms will face an even more challenging future. Their better-paying commercial and industrial customers – these units pay up to twice what domestic users are charged, while agricultural consumers are charged next to nothing – are already exiting the system, even if only partially. In 2022-23, 30 per cent of all industrial demand was met by captive units, with a growing share from renewables. Considering the cost advantage of renewables plus storage, by the end of this decade, this number is likely to be considerably higher. This also means that discoms will have fewer high-tariff paying customers to subsidise agriculture and lower income households, which will only aggravate their already precarious financial position, leaving MSMEs and the relatively more affluent households to bear the brunt of the state’s redistributive impulses. The demands on the state exchequer, which operates under a fixed borrowing constraint, will also only increase.
Over the past two-and-a-half decades, there have been multiple bailouts, restructuring and turnaround schemes for discoms. Carrots have been tried, and some sticks too. But, the end result has been the same. Another scheme, another bailout, is unlikely to bring about any meaningful change.
Arguably, the only way out of this quagmire is to open up the sector – usher in competition. Bring more players in distribution. It will help weed out inefficiencies in the system – in billing, collection, labour costs, for instance. And there does seem to be tremendous scope. Take, for instance, employee costs. In 2023-24, the labour costs of public sector discoms in states such as Punjab and Tamil Nadu were estimated at Rs 0.99 per Kwh and Rs 0.92 per Kwh — almost twice that of private discoms. Eliminating such inefficiencies will help bring down the cost of supply. Prices will correct. And the burden on the exchequer to provide free electricity will also come down.
Any such reform will be opposed by discoms. After all, incumbents, both public and private — they are all geographical monopolies — will always want to protect their turf. But, as seen around the world, such a market structure can lead to lower incentives to innovate, inflated costs, poor service and even regulatory capture.
State governments, however, also face the demand for cheaper power from industry. Average commercial and industry tariffs, which can be up to 40 per cent higher than the cost of supply, are higher when compared to some of India’s competitors. And within the country too, they vary considerably — from Rs 8.4 per kWh in Gujarat to Rs 10.22 per kWh in Tamil Nadu. As higher energy tariffs hurt competitiveness and act as deterrents for fresh investment, industry will flock to areas where costs are lower. Especially when cost-effective alternatives are available. Moreover, the imposition of carbon taxes – for instance, the EU’s CBAM – will only accelerate the industry’s push to clean energy.
Managing this balance – providing free/subsidised power for agriculture and households while supplying cheap power for industry – is a difficult proposition. No wonder in some states the same minister holds both the power and industry portfolios.
This is why, if there is one hill to die on, it is to usher in competition. The proposed amendments to the Electricity Act allow for multiple licensees/suppliers to operate in the same geographical area using their own or existing/shared infrastructure, in effect, laying the foundations of a competitive retail electricity market. Separating content (electricity) from carriage (wire) holds the key. Another bailout will not change anything. It’s the rules of the game that need to be changed.
But states will need to be incentivised to act. Perhaps, something like a 50-year interest-free loan for capital expenditure could be worked out. Perhaps the 16th Finance Commission could have provided a way forward.
Till next time
Ishan Bakshi
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