State-owned distribution utilities (discoms) continue to be in fragile financial health. Their precarious financial position is due to the high level of aggregate technical and commercial (AT&C) losses, the levy of inadequate tariffs when compared to the cost of power supply, and insufficient subsidy support from state governments. Their overall debt burden, despite the implementation of the UDAY scheme, is estimated to increase to around Rs 6 lakh crore in the ongoing financial year. Moreover, their annual cash losses are estimated to be about Rs 45,000-50,000 crore (excluding UDAY grants and regulatory income). And considering the highly subsidised nature of power tariffs towards agriculture and certain sections of residential consumers, the overall subsidy dependence is likely to be roughly Rs 1.30 lakh crore this year at the all-India level.
In its budget 2021-22, the Union government had announced the launch of a “reforms-based and results-linked” scheme for the distribution sector with the objective of improving the financial health and operational efficiency of discoms. Subsequently, the Revamped Distribution Sector Scheme was notified in July with an overall outlay of Rs 3.03 lakh crore. This is inclusive of a budgetary grant/support of Rs 97,631 crore, spread over a five-year period. Under the scheme, AT&C losses are sought to be brought down to 12-15 per cent by 2025-26, from 21-22 per cent currently, while operational efficiencies of discoms are to be improved through smart metering and upgradation of the distribution infrastructure, including the segregation of agriculture feeders and strengthening the system.
The scheme has two parts — Part A with an outlay of Rs 3.02 lakh crore, pertains to the upgradation of the distribution infrastructure and metering related works, while Part B, with an outlay of Rs 1,430 crore, is for training and capacity building, besides other enabling and support activities. Upon fulfilment of the pre-qualifying criteria and achievement of the basic minimum benchmarks, evaluated on the basis of proposed action plans by the discoms, they will be given financial assistance. Discoms and their state governments will have to sign a tripartite agreement with the central government in order to avail benefits under the scheme.
The action plan to be submitted by the discoms will be divided into two parts. The first part will contain an analysis of the reasons/root cause for losses, the steps proposed for reducing losses, the gap between costs and revenues, and the time required for implementing the changes. An inter-ministerial monitoring committee will finalise the “Results Evaluation Framework” based on the agreed-upon action plan, incorporating the result parameters. For this, the base year has been set at 2019-20 and the path to be taken by the parameters that are to be monitored — AT&C losses, the ACS-ARR (average cost and revenue) gap, infrastructure upgradation, consumer service, hours of supply, and corporate governance — will be set up for the five-year period ending in 2025-26. Only those discoms that meet all the pre-qualifying criteria will be eligible for the release of funds. A loss-making discom will not be eligible unless it draws up plans to reduce its losses, approved by the state government and filed with the central government.
The second part of the action plan will comprise listing out the work plan for loss reduction and further strengthening of the distribution systems. The state/discom will be able to access funds for addressing infrastructure constraints in the distribution system. Priority will be given to work necessary for AT&C loss reduction.
As far as the agricultural sector is concerned, the use of solar power projects to supply electricity to these consumers through the agriculture feeder route is likely to result in savings. This is because of a combination of high tariff competitiveness offered by solar power, lower technical losses due to proximity to load centres, and the ability to meet demand during the day when sunlight is available.
A continuing area of concern affecting discom finances is the significant delay in the process of tariff determination in many states. As of now, only 19 out of 28 states have issued tariff orders for 2021-22, indicating sluggish progress. In fact, tariff orders have not been issued for the past two years in Rajasthan, Tamil Nadu, Telangana, Kerala and West Bengal. Further, there is upward pressure on the cost of power supply for distribution utilities, considering the dominant share (around 70 per cent) of coal in the fuel mix for energy generation, the strengthening of imported coal prices and the possibility of domestic coal price revisions by Coal India. As a consequence, a cost-reflective tariff determination process, coupled with the timely pass-through of power purchase costs, remains critical for the utilities.
On the whole, while the focus on improving the operational efficiency, and ensuring the financial sustainability of discoms is indeed welcome, timely implementation of the reforms is critical to achieving the milestones. In addition, the delicencing initiative proposed by the central government can effect significant changes in the distribution segment, facilitating competition and placing emphasis on the quality and reliability of power supply and consumer services. However, strong political will and support from state governments are needed to ensure movement on all these issues.
This column first appeared in the print edition on October 13, 2021 under the title ‘Powering the discom’. Majumdar and Kadam work at ICRA Ltd
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