Why India’s Power Distribution Sector Needs Reform?

In the first tranche of the 20 lakh crore economic package, the Finance Minister Nirmala Sitharaman injected Rs.90000 crore to financially stressed state power distribution companies (DISCOMs) so that they can repay their debts to power generation companies (GENCOs) and transmission companies (TRANSCOs).

[You may also read: All about Modi’s 20 lakh crore package] & [Tranche 1 of the package]

Later, the Government also took the decision to privatise all DISCOMs in the 8 Union Territories (UTs) and to explore public-private partnerships (PPP) for power distribution in some states.

[You may also read: Tranche 4 of the package]

So, why was there a need to infuse Rs.90000 crore in the DISCOMs?

To understand the problems plaguing the power distribution sector, let us consider the three stages involved in the delivery of power/ electricity to consumers: Power Generation (done by GENCOs), Transmission (by TRANSCOs), and Distribution (by DISCOMs).

1. Generation: Electricity in India is generated by thermal power plants, hydroelectric power plants, nuclear plants, and other alternate sources like solar, wind, biomass, etc. Major state-owned enterprises involved in the generation of electricity are NTPC, NHPC, and Nuclear Power Corporation of India (NPCIL). And, private enterprises involved are Tata Power, Adani Power, or renewable companies like ReNew Power or Greenko. As on October 31, 2019, India’s installed power generation capacity reached 364.9 gigawatts, which is sufficient to meet the country’s electric demand.
2. Transmission: Transmission of electricity is the bulk transfer of power from a generating site over a long distance at high voltage. The PowerGrid Corporation of India is responsible for the inter-state transmission of electricity. The entire country has been divided into five regions for transmission, namely, Northern Region, North Eastern Region, Eastern Region, Southern Region, and Western Region. The Interconnected transmission system within each region is called the regional grid. Further, each state has a State Transmission Utility (STU) along with private transmission companies that are responsible for setting up intra-state transmission projects.
3. Distribution: It is the last-mile distribution of power. DISCOMs delivers electricity from the transmission system to individual consumers. It is done usually by state-owned companies, but in some cities like Delhi, Mumbai, Ahmedabad, and Kolkata, private enterprises also operate.

So, essentially, DISCOMS purchase power from GENCOs and supply it to end consumers. India is a power surplus country, but there are constraints in the transmission and the distribution system due to which this surplus power cannot be efficiently transmitted (The distribution is the weakest link).

The reason is distribution companies are unable to invest in adequate infrastructure for the efficient delivery of power as their finances are in a terrible shape

These state DISCOMs are in terrible financial shape due to a number of factors-

• DISCOMs are required to pay a fixed cost to the GENCOs, irrespective of whether the State buys power from it or not. They pay a variable charge when it does. These charges are determined by the long term power purchase agreements (PPAs) signed between distributors and generators.
• But, DISCOMs are unable to recover their expenses (cost of purchase of power, operational expenses, etc) as they cannot charge tariffs from the final consumers that reflect their true costs. This is due to political considerations.
• Moreover, tariffs are cross-subsidized. Higher tariffs are charged from industries and the commercial sector (malls etc) to subsidise the free or subsidised power given to agriculture and the domestic segment. The Government has been trying to reduce the cross-subsidisation, but increasing tariffs is a politically sensitive issue.
• Not only DISCOMs are not able to charge higher tariffs, they cannot even realise the tariffs from consumers due to ineffective billing procedure. Theft and pilferage are also prevalent. To add to this, local/ state governments and departments do not pay their dues on time.
• Also, power gets lost in transmission and distribution due to inadequate infrastructure.
• As a result, India’s average aggregate technical and commercial (AT&C) losses are very high. [AT&C is a technical term that is a combination of energy loss (Technical loss + Theft + inefficiency in billing)& commercial loss (Default in payment + inefficiency in collection).]

To turnaround the DISCOMs, the Government had launched Ujwal DISCOM Assurance Yojana (UDAY) in 2015, but the scheme failed to achieve the desired results. This scheme allowed states to take over 75 % of the DISCOM’s debt and issue bonds in its place. The proceeds from the issuance of the bonds could be transferred to DISCOMs in the form of a grant, equity, or debt.

The Government had also tried to make amendments in the Electricity Act, 2003 in 2014 and then again in 2018, but faced resistance from the states. The amendment intended to introduce sweeping structural reforms in the electricity sector [The Government has again put the draft Electricity Bill, 2020 in the public domain after 2 unsuccessful attempts].

So we know, even before COVID-19 hit, India’s DISCOMs were already in trouble. The DISCOMs dues to GENCOs had touched Rs.87,000 crores. The aggregate technical and commercial (AT&C) losses on average were about 18.94%.

India’s national lockdown due to COVID-19 worsened the situation. It resulted in a reduction in the country’s power demand by 20-25 % due to the shutdown of many industrial and commercial establishments. Nevertheless, they had to pay fixed charges to the GENCOs.

Currently, pending dues to GENCOs stand at Rs.94000 crore. The AT&C losses are at 21.4%.

Therefore, the Government had to step in to take measures. On 28th March, the Government allowed distribution companies to defer payments to GENCOs for 3 months

The Government infused Rs.90000 crore liquidity to the DISCOMs as part of the economic package. This amount will be lent by power sector-specific lenders- Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). The amount will be lent only against guarantees given by states to repay the loan if the DISCOM is unable to repay.

PFC and REC will raise the amount (Rs.90000 crore) from the market against the receivables of DISCOMs.

The Government also privatised DISCOMs of all the 8 UTs. (The DISCOMS in UTs are administered by the Central Government). They are looking to replicate it in states so as to bring in operational and financial efficiency in the power distribution sector.

The Union government will approach some other states for a public-private partnership (PPP) mode on the lines of Delhi or Odisha to bid out their distribution companies.

Odisha was the first state to privatize its power distribution sector into four discoms in 1999.

This was followed by Delhi, which privatised three of its discoms in July 2002: BSES Rajdhani Power Ltd (BRPL), BSES Yamuna Power Ltd (BYPL) and Tata Power Delhi Distribution Ltd.

Source: HT

Lastly, the Government also wants to expedite setting up of smart metres to improve billing efficiency.

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