India’s DisCom stress is more than the sum of its past

ECONOMY/ GOVERNANCE

Topic: General Studies 1,2:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development 
• Infrastructure: Energy

India’s DisCom stress is more than the sum of its past

Context: The Indian government responded to COVID-19’s economic shock with a stimulus package of ₹20-lakh crore, out of which ₹90,000 crore was earmarked for DisComs (later upgraded to ₹1,25,000 crore).

DisComs are the utilities that typically buy power from generators and retail these to consumers. 

Financial Issues with DisComs

• Not Exactly a Stimulus: While government’s package was called a stimulus, it is really a loan, meant to be used by DisComs to pay off generators. Stimulus loans are near market term and not soft loans.
• Threat from Renewable Energy: Increasing competition from Solar Powers whose tariff has come down to Rs 2.90 per unit (as compared to Rs 6 per unit average cost of electricity supply for distribution utilities) combined with existing long-term Power Purchase Agreements (PPAs) with mainly coal-based thermal power generating projects has led to financial rigidity & therefore financial loss for DisComs.
• Impact of COVID-19: The pandemic has completely shattered incoming cash flows to utilities. The lockdown disproportionately impacted revenues from commercial and industrial segments. But a large fraction of DisCom cost structures are locked in through PPAs that obligate capital cost payments.
• Underestimation of dues: The government’s PRAAPTI (or Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal shows that DisCom dues to generators are in range of one lakh crore rupees. The portal is a voluntary compilation of dues, and is not comprehensive.
• Rise in Informal loans: Over the years, DisComs have delayed their payments upstream (not just to generators but others as well) — in essence, treating payables like an informal loan. 

Why do DisComs not pay on time? 

1. Inefficiency of utilities leads to high losses, called Aggregate Technical and Commercial (AT&C) losses, a term that spans everything from theft to lack of collection from consumers. However, this is an incomplete explanation
2. Challenge of payables to DisComs. 

DisComs cash flow is disrupted due to dues that are payable to them.These dues are of three types. 

• Improper Tariff fixation by regulators: Regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets,which are to be recovered through future tariff hikes. 
• Pending Subsidies: Second, about a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments. Cumulative unpaid subsidies, with modest carrying costs, make DisComs poorer by over ₹70,000 crore just over the last 10 years.
• Consumer Bills pending: Third, consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.

Way Ahead

• More Stimulus: There is a need a much larger liquidity infusion so that the entire electricity chain will not collapse
• Improving AT&C losses is important, but will not be sufficient. We need a complete overhaul of the regulation of electricity companies and their deliverables. 
• Rationalisation of subsidies whereby doling out of free electricity can be eliminated to those who do not deserve such support.
• Proper Regulation: Regulators must allow cost-covering tariffs. 
• Realigning PPAs in the wake of renewable energy: In the interim, it may be prudent for the discoms to sign only medium-term PPAs, if at all, as most of the power transactions move to the power exchanges.

Connecting the dots:

• Draft of Electricity (Rights Of Consumers) Rules, 2020