Ensuring sustainable turnaround in financial health of discoms

Q Why is the context ?

A In its budget 2021-22, the Union government had announced the launch of a “reforms-based and results-linked” scheme for the distribution sector.

Q What is the financial condition of discoms ?

Their overall debt burden, despite the implementation of the UDAY scheme, is estimated to increase to around Rs 6 lakh crore in the ongoing financial year.
Moreover, their annual cash losses are estimated to be about Rs 45,000-50,000 crore (excluding UDAY grants and regulatory income).
Due to highly subsidised nature of power tariffs towards agriculture and certain sections of residential consumers, the overall subsidy dependence is likely to be roughly Rs 1.30 lakh crore this year at the all-India level.

Q What are key features of Revamped Distribution Sector Scheme ?

In its budget 2021-22, the Union government had announced the launch of a “reforms-based and results-linked” scheme for the distribution sector.
Subsequently, the Revamped Distribution Sector Scheme was notified in July with an overall outlay of Rs 3.03 lakh crore.
Under the scheme, AT&C losses are sought to be brought down to 12-15 per cent by 2025-26, from 21-22 per cent currently.
Operational efficiencies of discoms are to be improved through smart metering and upgradation of the distribution infrastructure, including the segregation of agriculture feeders and strengthening the system.
The scheme has two parts Part A with an outlay of Rs 3.02 lakh crore, pertains to the upgradation of the distribution infrastructure and metering related works.
Part B, with an outlay of Rs 1,430 crore, is for training and capacity building, besides other enabling and support activities.
Discoms and their state governments will have to sign a tripartite agreement with the central government in order to avail benefits under the scheme.
Only those discoms that meet all the pre-qualifying criteria will be eligible for the release of funds.
A loss-making discom will not be eligible unless it draws up plans to reduce its losses, approved by the state government and filed with the central government.
As far as the agricultural sector is concerned, the use of solar power projects to supply electricity to these consumers through the agriculture feeder route is likely to result in savings.
This is because of a combination of high tariff competitiveness offered by solar power, lower technical losses due to proximity to load centres, and the ability to meet demand during the day when sunlight is available.
In addition, the delicencing initiative proposed by the central government can effect significant changes in the distribution segment, facilitating competition and placing emphasis on the quality and reliability of power supply and consumer services.

Q What is Issue with tariff determination ?

A continuing area of concern affecting discom finances is the significant delay in the process of tariff determination in many states.
As of now, only 19 out of 28 states have issued tariff orders for 2021-22, indicating sluggish progress.
Further, there is upward pressure on the cost of power supply for distribution utilities, considering the dominant share (around 70 per cent) of coal in the fuel mix for energy generation, the strengthening of imported coal prices and the possibility of domestic coal price revisions by Coal India.
As a consequence, a cost-reflective tariff determination process, coupled with the timely pass-through of power purchase costs, remains critical for the utilities.

Q What can be the way forward ?

On the whole, while the focus on improving the operational efficiency, and ensuring the financial sustainability of discoms is indeed welcome, timely implementation of the reforms is critical to achieving the milestones.