As collective losses of DISCOMs cross Rs 1 lakh crore, their poor financial health can risk India’s financial system and its clean energy transition due to delays in signing of Power Purchase Agreements (PPA)

The power distribution companies (discoms) in India seem to be headed for tougher days, as the financial books of discoms are continuing to worsen with the collective losses swelling over Rs. 1 lakh crore. This potentially can wipe out all the profits attained through improvements in the sector over the last couple of years.

India accounts for almost 40% of Asia’s renewable capacity expansion and is on its way to becoming the third-largest growth market after China and the US. In the period of the next five years, the nation is likely to add 121 GW of renewable capacity, an 86% increase from existing capacity. India is set for the fastest rate of renewable capacity growth among major economies in the next five years, doubling additions versus 2015-2020. This supports the country’s new goal of 500 GW of renewable capacity by 2030 & highlights its potential to accelerate its clean energy transition. However, renewable power projects face risk, according to the IEA report, due to the “poor financial health” of India’s discoms causing delays in the signing of PPAs. 

Following the second wave of restrictions, the discoms’ total overdue payments have started to rise again. As a result of which, discoms are deferring the finalisation of wind and solar PV PPAs while seeking to renegotiate downwards the contract prices already awarded in competitive tenders. Belated PPA approval is one of the reasons for delayed execution of renewable projects. 

According to estimates from a Niti Aayog Report, the gross debt of discoms across India will rise to INR 6 lakh crores by March 2022, primarily due to loans availed under the liquidity infusion scheme announced in May 2020. This is nearly 50 per cent higher than the debt levels at the commencement of Ujwal Discoms Assurance Yojana (UDAY) scheme. Further, the discoms’ expected net losses are projected to be in the tune of INR 90,000 crore in FY 2021. Their financial distress has reverberated across the value chain and hit generation companies particularly hard. Recently, the Power Ministry has urged banks to exercise caution while giving loans to state power distribution utilities to avoid putting the financial system at risk. This is the first time that the Centre has warned banks, expressing concern about the financial position of distribution companies and potential adverse impact on the banking system.

Recently, the Government of India propelled an innovative scheme to mend the distribution structure of the discoms with the chief intent of refining their financial health. Under this scheme, the discoms will be offered financial assistance provided they meet certain criteria laid by the government. The total outlay for the scheme is around INR 3.03 lakh crore, spread over five years. The objective of the scheme is to bring down commercial losses in the range of 12-15 per cent and also reduce the difference between the average cost of supply (ACS) and average revenue realised (ARR) to zero by 2024-25. However, more can be done to address the issues faced by discoms. 

•          Sustenance of High Billing and Collection Efficiency:
 The overall AT&C loss figure in India is as high as 24 per cent. Discoms need to improve their billing efficiency through better metering infrastructure. The recent central government scheme to achieve 100 per cent metering using prepaid or smart meters is a step in the right direction. Improved metering infrastructure can help reduce thefts and improve collection efficiency. A significant reduction in technical losses is possible through investment in improving grid infrastructure. Discoms should upgrade their distribution infrastructure in a timely manner to achieve sustained high billing and collection efficiency. 

•          Reduction in Power Purchase Cost:
  Discoms have locked into long-term, expensive power purchase agreements which contribute significantly to the power tariff. Where feasible, discoms should be given an option to exit such expensive and long-term PPAs. Discoms can use time of day tariffs, enabled by advanced metering and a smart grid, to reduce the power purchase costs. Discoms could gradually increase the renewable energy (RE) portfolio to reduce the overall power procurement costs. 

•          Conductive Regulatory Environment:
 Tariffs to be regularly revised by State Electricity Regulatory Commission (SERC) so that they can fairly reflect the actual costs. New regulatory assets creation should be stopped by SERCs. The existing regulatory assets need to be liquidated over the next three to five years through appropriate tariff changes. For the long term viability of the sector, the regulatory functions are to be insulated from political pressures. Regional electricity regulatory commissions with the participation of the central government will be a welcome step.

•          Timely payment of Subsidies by the State Government:
 Delays in receiving subsidy reimbursements from the government add to the liquidity stresses of discoms. The outstanding dues of subsidies to state power discoms has increased to INR 71,000 crore. Timely disbursement of subsidy will improve the cash flow situation of the distribution companies. 

•          Higher Private Sector Participation and Competition in Distribution:
 Delhi distribution unbundling and sale of DVB majority stakes to Tata Power and BSES is often cited as a model of successful privatisation. The billing and collection efficiencies of Discoms in Delhi are above 91 per cent and 99.5 per cent, respectively, leading to an aggregate AT&C loss below 8-9 per cent. Though Delhi distribution landscape is not representative of the rest of the country, particularly in urban and industrial areas, such private-sector model can be tested to bring a turnaround in the sector.

•          Improve cash flow, reduction in Debt and Interest burden:
 Increasing regulatory assets are creating a cash-flow gap for discoms, forcing them to borrow funds to cover the revenue deficit. The borrowing adds to the interest burden on the discoms, which ultimately affect the consumer through higher tariff. The state regulators and government should come out with a permanent solution to the regulatory asset problem faced by the discoms for the long-term viability of the financial health of the sector. 

In an earlier statement by the government, the policy had stated that the privatisation of discoms should be encouraged; it would make sense to consider this transitional support as a catalyst. The significant onus of support can be controlled around a normative basis and the performance of the discoms can be monitored over a stipulated period of time. Adopting this approach will ensure that the government moves away from the micro-management of discoms, which inevitably happens if the release of funds is linked to reform-linked parameters. Now its time to try a new approach, different from what was done in the past which clearly has not paid dividends despite the huge quantum of money spent.