India has made great strides in power generation and coverage over the years, but what remains unchanged is the massive losses of power distribution companies, or discoms as they are commonly called. Legacy issues and halting embrace of technological upgrades have ensured that discom companies, most of which are run by the state governments, have failed to turn a profit despite the efforts of successive governments at the Centre. With renewables, India is poised for a leap into the future of energy generation, which only makes it more crucial that the issues of the discoms are addressed first. The Centre has now approved a Rs 3 lakh crore package to drag the discoms onto a stronger financial footing. Here’s what you need to know.
What is the package okayed by the Union Cabinet?
Union Finance Minister Nirmala Sitharaman had in her budget speech in February this year announced a revamped reforms-based, result-linked power distribution sector scheme. She had said that the scheme would provide assistance to discoms for infrastructure creation but would be extended on the basis of actions by the companies to rectify their finances.
As the Cabinet Committee on Economic Affairs (CCEA) gave its approval this week to the scheme, it was reported that it has a span of five years and will provide funds to discoms for, among other things, setting up 25 crore smart meters, 10,000 feeders, 4 lakh kilometres of low-tension overhead lines.
Reports said that to take advantage of this scheme, the states will have to show they have met certain preconditions, like the publication of audited financial reports, upfront liquidation of state government dues and subsidies to discoms and non-creation of additional regulatory assets.
Further, the Centre said that three programmes for the power sector — Integrated Power Development Scheme, Deen Dayal Upadhyaya Gram Jyoti Yojana, and Pradhan Mantri Sahaj Bijli Har Ghar Yojana, or Saubhagya — will now be merged.
What ails the discoms?
In her budget speech, the finance minister had noted that in the previous six years, the power sector had seen “a number of reforms and achievements”. Notable among which was the addition of 139 gigawatts of installed capacity while 2.8 crore new household connections had been set up along with the laying of a further 1.41 lakh circuit kilometres of transmission lines. India is now third in the world in terms of electricity production and consumption.
But the functioning of discoms has remained a vexing issue. According to a study last year by the Institute for Energy Economics and Financial Analysis (IEEFA), “ailing state-owned power discoms continue to hamper the efficient functioning of the generation and transmission sectors”, the latter two being the other components of the country’s power sector. The report said that as of May 2020, discoms had a debt of about $16bn to power generators that they were yet to clear.
The reasons for the rut the discoms seem to be stuck in are manifold. First, is the question of low tariffs. A PRS Legislative Research study in 2014 had noted that “supplying electricity at tariff lower than the cost to supply, along with delay in tariff revisions has led to discoms facing huge financial losses”.
Where do discoms lose money?
The key factor hampering discoms’ performance and profitability is AT&C losses, or Aggregate Technical and Commercial Losses. Technical losses represent the power that goes to waste during transmission and distribution with theft also playing a part while commercial losses include the failure to realise revenues due to inefficient billing and collection and payment defaults.
Simply put, AT&C losses account for the percentage of power for which a discom did not receive any payment. While AT&C losses have come down, they still stand at close to a fifth nationally. Compared this to countries like the UK and US, where AT&C losses are 6-7 percent.
In her budget speech, the finance minister had also talked about the monopolies held by discoms across the country and proposed that a competitive framework will be created that would allow consumers to choose the discom from which they want to buy electricity.
The IEEFA study had also noted the role of “unsustainable cross-subsidies, economically inefficient tariff setting processes, expensive thermal power purchase agreements (PPAs), and a lack of modern technology and infrastructure development” as factors adding to discoms’ losses.
Further, during the lockdown, the discoms have suffered from the suspension of manufacturing and commercial activity.
How will the new scheme help? Where do the states come in?
With AT&C losses being a focus area for any efforts to pare discoms’ losses, smart metering has been pushed as a key solution. According to Energy Efficiency Services Ltd. (EESL), which is executing the Smart Meter National Program (SMNP) to replace 25 crore conventional meters with smart meters, there are gains in billing efficiency and reduction of AT&C losses to be made from the initiative. Installation of just 11 lakh smart meters “resulted in an aggregated revenue increase of Rs 264 crore annually, said a report by advocacy group Alliance for an Energy-Efficient Economy (AEEE).
Ending power discom monopolies is also being seen as a crucial and necessary change to end losses and empower consumers. Experts say that “delicensing of electricity distribution sector to end the existing monopolies… will encourage retail competition”. It can have the same, far-reaching impact that the ending of state monopolies had for the telecom sector.
But ending state monopolies is easier said than done. Power is a concurrent subject, which means that the state governments can frame their own rules and mechanisms to administer power production, purchase and sale. In fact, the UDAY, or Ujwal Discom Assurance Yojana that the Centre had launched in 2015 with the aim of bringing about “financial turnaround, operational improvement, reduction of cost of generation of power,” etc. is a voluntary scheme and state governments can decide against joining it. However, all states and Union Territories, except Delhi, West Bengal and Odisha, are part of the scheme.
Experts say that while certain states have private power distributors, state governments may be reluctant to transfer distribution to private players.