Financial sustenance an uphill task for Indian discoms

By Smera Chawla

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With an installed capacity of 303, 083 MW, the Indian electricity sector is the fifth largest in the world and one of the most complex systems. The power sector value chain has three pillars: Generation, Transmission and Distribution. Distribution is the most important link in the entire power value chain as it is the only interface between the utilities and the consumers. Power is a concurrent subject as per the Indian Constitution, thus the responsibility for distribution and supply of power to consumers rests with the States.

Issues with the Distribution Sector

It is through power distribution companies (Discoms) that we get electricity in our homes, offices, schools, colleges, hospitals etc. These discoms are run both by central and state governments. Over the years these discoms have plunged into heavy losses. Discoms across the country have over Rs 4.5 lakh crore of debt. Rajasthan is lumbered with discom losses of approximately Rs. 80,000 crore, the highest in the country.

The primary reason for sustained losses for the discoms has been delayed and inadequate power tariff hikes. Due to this most discoms are caught in a vicious cycle of pilling losses and mounting debt, which leaves no scope for them to buy power from power generators to satisfy the rising power demand in the country. According to a study done by ICRA, distribution utilities in only 19 of the 29 states have filed tariff petitions for FY17 so far. Inadequate hikes sought from the regulator by the state discoms further adds to the losses. State discoms such as Bihar, Karnataka, Madhya Pradesh, Nagaland, Telangana and Uttrakhand have proposed a tariff revision in the range of 7 – 25 per cent. However, states including Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Punjab and Odisha have not proposed any tariff revision. It is up to the respective state regulators to now treat the revenue gap.

In addition, discoms face liquidity pressure due to high Aggregate Technical and Commercial losses (AT&C). These have two components – Technical loss and Commercial loss. Technical losses are unavoidable and are due to the flow of power in the transmission and distribution system. For Indian networks these losses generally range from 8-12 per cent. The commercial losses are due to several factors which include theft of electricity, deficits in metering, mis-use of category on realisation of revenues. Prior to privatization of the discoms, these loses were around 57 per cent on an average in India. In the year 2003, with the entry of private players these losses have been reduced to an average of 14-20 per cent.

A number of times, this link of the power vale chain has been provided a lifeline by the Government through Financial Restructuring Packages (FRP). The power sector distribution companies have been bailed out by the Government three times in 13 years. Short-term liabilities of discoms not performing well were restructured with sponsor states taking over half of them through state guaranteed bonds in a phased manner. The remaining 50 per cent was converted to long term loans guaranteed by the state governments with a suspension on principal repayment for three years. Although this provided the much needed liquidity flow, but losses in the discoms did not reduce due to continuing AT&C losses and inadequate tariff hikes.

UDAY Scheme

In order to rescue the state bankrupt discoms the Government launched the Ujwal Discom Assurance Yojna (UDAY) scheme in 2015. The scheme was launched with the aim of easing out the financial crunch facing power distribution companies that has made it significantly difficult to buy electricity. The UDAY scheme focuses on four major initiatives – improving operational efficiencies of the discoms, reduction of cost of power, reduction in interest cost of discoms and enforcing financial discipline on discoms through alignment with state finances. Operational efficiencies are to be brought in by compulsory smart metering, up gradation of transformers and meters to check on electricity lost during transmission and distribution (theft) from 22 per cent to 15 per cent by 2018-19.

The objective of this scheme is that ‘consumers should not bear the cost of inefficiency of discoms’. UDAY is an opportunity for the discoms to clear their books and improve their efficiencies. According to ICRA, the transfer of debt will lead to a relief in the cost of supply of about 50 paise per unit pan India by 2017-18. Furthermore, the benefits on account of the reduction in transmission losses and validation of coal supplies and the savings are significant.

Though the Ministry of Power has projected transmission losses will come down to 15 per cent by 2019, this assumption looks unrealistic, as per industry experts. ICRA predicts a one per cent reduction in transmission losses and savings of 24 paise by 2017-18. Add another 20 paise on account of rationalization of supplies and the total reduction in cost works out to 90 paise. Despite this, discoms are still likely to have financial constraints as the gap between revenue realisation and cost of supply was higher at around Rs 1.15 per unit in 2013-14. While the Government is trying its best to ensure a flawless power distribution sector, UDAY alone will not address the issues. Necessary tariff hikes is imperative for the discoms to survive and provide uninterrupted power supply across the nation.