Baba’s Explainer – State of DISCOMs

  • IASbaba
  • July 28, 2022
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  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development 
  • GS-3: Infrastructure: Energy

Context: On July 13, the Tamil Nadu state DisCom filed a power tariff revision petition with the Tamil Nadu Electricity Regulatory Commission proposing to hike power tariffs by 10% to 35%. If the proposal comes into effect, expected in September, the hike will be after a gap of eight years.

What are Discoms?
  • Power generation, transmission, and distribution are the three main processes involved in the power sector.
  • Distribution is done by the Distribution Companies (DISCOMs) which connect power producers to the households. They are the interface between utilities and the consumers.
  • In other words, DisComs (Distribution Companies) are the utilities that typically buy power from generators and retail these to consumers.
  • Under the Indian Constitution, power is a concurrent subject and the responsibility for distribution and supply of power to rural and urban consumers rests with the states.
  • Hence, DISCOMs are predominantly owned by the state governments. Private DISCOMs are also operational in India but are limited to a few cities like Delhi and Mumbai.
  • Since many years, most power distribution companies in India are in bad financial condition.
What are the financial challenges being faced by the DISCOMs in India?
  • High AT&C (Aggregate Technical and Commercial) losses, at 21.7%, due to poor or inadequate infrastructure or on account of theft or bills not being generated or honoured.
    • AT&C loss reflects the loss due to energy loss during transmission and distribution (technical reasons), theft, and inefficiency in billing and commercial loss such as inefficiency in collection, and default in payment.
  • Determination of tariffs: DISCOMs are not hiking their tariffs in line with increased cost. This is because most of them are owned by State governments and in order to make electricity affordable to citizens, democratically elected governments succumb under populist pressure so as to not go for a price hike. Also, there are frequent delays in the tariff determination process.
    • In Gujarat, the Aam Aadmi Party (AAP) has promised free electricity if it is voted to power in the Assembly election to be held later this year.
    • In case of central generating stations and where two or more states are involved, the Central Electricity Regulatory Commission determines the tariff. In case of generating stations within a state, tariff is determined by the respective State Electricity Regulatory Commissions.
  • Poor Cash Flow: Power distribution companies collect payments from consumers against their energy supplies (purchased from generators) to provide necessary cash flows to the generation and transmission sectors to operate. Due to the perennial cash collection shortfall, often due to payment delays from consumers, Discoms are unable to make timely payments for their energy purchases from the generators.
    • This overhang limits their ability to pay on time, forcing them to run up operational debt to electricity suppliers and transmission firms.
  • Lack of metering: Various levels in the distribution chain (the feeder, the distribution transformer (DT) and the consumer) have not been fully metered. As a result, it difficult to isolate and identify loss-making areas and take corrective action.
  • Competition 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.
  • 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.
  • Ambitious Scheme without adequate support: The Centre’s “Electricity for all” programme have contributed to greater inefficiency. Because, to support higher levels of electrification, cost structures need to be reworked. Similarly, the distribution network (transformers, wires, etc) need to be augmented. In the absence of such measures, losses are bound to rise.
  • Profitability: The gap between discoms’ costs (average cost of supply) and revenues (average revenue realised), supposed to have been eliminated by now, stands at Rs 0.49 per unit due to lack of regular and commensurate tariff hikes.
    • According to Niti Aayog’s report of August 2021, most power DISCOMs incur losses every year — the total loss was estimated to be ₹90,000 crore in the financial year 2021.
    • Due to these accumulated losses, DISCOMs were unable to pay for generators on time — as of March 2021, an amount of ₹67,917 crore was overdue.
What key schemes have been launched by the Govt to address the DISCOM problem?

Various steps have been taken by the govt to resolve the problems being faced by the DISCOMs:

UDAY Scheme:

  • Launched in November 2015, the Ujjwal DISCOM Assurance Yojana (UDAY) was designed to turn around the  financial position of DISCOMs.
  • The state governments took over 75 % of the debt of their DISCOMs, issuing lower-interest bonds to service the rest of the debt.
  • In return, DISCOMs were given target dates (2017-19) to meet efficiency parameters like reduction in power lost through transmission, theft and faulty metering.

Reforms-Linked, Result-Based Scheme for Distribution (RLRBSD):

  • In budget 2021-22, the Union government had announced the launch of a “reforms-based and results-linked” scheme for improving the financial health and operational efficiency of discoms.
  • Under the scheme, AT&C losses will be brought down to 12-15% by 2025-26, from 21-22%.
  • Operational efficiencies of discoms will be improved through smart metering and upgradation of the distribution infrastructure, including the segregation of agriculture feeders and strengthening the system.

Liquidity Scheme

  • To help these DISCOMs, the Centre in May 2020, announced a Liquidity Infusion Scheme (Aatmanirbhar Bharat Abhiyan), under which loans of ₹1,35,497 crore have been sanctioned. As of December 31, 2021, a total of ₹1.03 lakh crore has been disbursed.
What is the situation of power sector in Tamil Nadu?
  • In Tamil Nadu, all domestic consumers are entitled to 100 units of free electricity bi-monthly since May 2016.
  • Tamil Nadu could not bring down the gap between the Average Cost of Supply (ACS) and the Average Revenue Realised (ARR) to nil by 2018-19, as stipulated in the UDAY scheme. On the contrary, the gap rose to ₹1.07 per unit in 2019-20 against ₹0.6 per unit in 2015-16.
  • The cumulative financial losses of Tamil Nadu State DISCOMS went up from ₹18,954 crore in 2011-12 to ₹ 1,13,266 crore in 2020-21.
  • The State government has made an allocation of ₹13,108 crore in 2022 in the form of budgetary support to absorb the losses of State DISCOM (TangedCo)
  • If the recent proposal of tariff hike comes into effect, expected in September 2022, the hike will be after a gap of eight years.
  • Despite the Centre’s prescription for annual or periodical revision of retail power tariff, States have not complied. The general approach is to use electricity as a tool for political agenda and make promises to allure people despite knowing that such assurances, if implemented, are not sustainable in the long run.
  • The Centre tightened its focus on the State by having withheld, through the Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC), the release of ₹3,435 crore under the Special Liquidity (Aatmanirbhar Bharat Abhiyan) loan scheme.
  • The Reserve Bank of India (RBI) has issued a guideline to commercial banks that if lending is to be provided to any State-owned power utility including DISCOMs, the entity should have filed a tariff revision petition by November 30 every year.
Do States provide subsidies to sectors like agriculture?
  • A common feature of the power distribution policies of the States is to provide free or heavily subsidised supply to agriculture. The connections for the farm sector are unmetered.
  • Tamil Nadu, which has been implementing free power supply for the sector since the mid-1980s, had long resisted the installation of meters even for fresh connections. But it has been allowing the installation of meters for agricultural pump sets.
    • Government claims that the meters are there only to do an assessment of consumption and not for billing.
  • Segregation of feeders has been suggested as an option to arrive at the accurate consumption of the farm sector so that the disproportionate quantum of consumption is not attributed to agriculturists in the absence of meters. Gujarat is cited as a success story in this regard.
  • In Manipur, according to the Niti Aayog’s report, prepaid metering was supplemented with improved power supply, resulting in improved billing and collection efficiency as well as lower commercial losses.
  • The Madhya Pradesh Electricity Regulatory Commission, in its tariff order of March 2022, came out with an incentive package in the area of demand side management by promoting energy efficient devices
What is the way ahead?
  • Improving AT&C losses: Many discoms need to improve their billing efficiency through better and smart metering.
  • Rationalisation of subsidies whereby doling out of free electricity can be eliminated to those who do not deserve such support.
  • Privatisation of DISCOMS: Only 10% of India’s population is served by private distribution licensees. Hence, good Corporate Governance and higher private participation in distribution hold out the possibility of greater efficiency.
    • It is an experiment that has yielded positive results in many cities, including Delhi, Mumbai, Kolkata and Ahmedabad. Before it was privatised in 2002, AT&C losses in the national capital were at a high 53% and the government was subsidising discoms to the extent of Rs 12,000 crore every year. After privatisation losses came down, and today Delhi has one of the lowest AT&C losses among DISCOMs in the country at just 8 per cent.
  • Regulatory Reforms: The state governments should promote autonomy, competence and transparency of the State Electricity Regulatory Commission (SERC). Depoliticisation of DISCOMs is a necessity.
  • Renewable Energy Integration Reforms: DISCOMs need to prepare to accommodate an increasing amount of renewable energy (RE), from generators as well as prosumers.
  • Addressing the concerns of Agricultural Consumers: Under the PM-KUSUM scheme, day-time, low-cost supply can be provided to a large number of farmers by installing megawatt scale solar plants, which supply eight hours of quality power directly to dedicated agricultural feeders.
    • This would address farmers’ demand for reliable supply and almost halve the discom’s cost and subsidy requirements.
    • RDSS prioritizes investments and grants towards dedicated agricultural feeders to accelerate feeder solarisation. This grant support can provide reliable supply and reduce subsidy requirements.
  • More Stimulus: There is a need a much larger liquidity infusion so that the entire electricity chain will not collapse

Mains Practice Question – What factors have led to the poor financial health of DISCOMs? Suggest measure to improve the situation.

Note: Write answers to this question in the comment section.


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