While improving efficiency is critical for turning around the situation at power distribution companies (discoms), tariff reforms, especially, are the need of the hour. It will not be a challenge if the tariffs are revised every year in a phased manner after factoring in retail inflation. For this, the government should look at creating an environment that is less regulated or controlled to ensure private participation in franchises.
Too many wings fluttered among power sector stakeholders when the rating agency CRISIL published a report in May 2019 highlighting that the discoms' debts were to reach the pre-Ujjwal Discoms Assurance Yojana (UDAY) levels of Rs 2.64 trillion in the current fiscal. Although the unstable financial condition of the state electricity boards (SEB)s, commonly referred to as discoms, was known to all, it was hard to digest that the accumulated losses nose-dived again to the same levels within a shorter period.
UDAY is a scheme approved by the central government in 2015 aiming to help the distribution utilities for a financial turnaround and its revival. The scheme also offered a sustainable permanent solution for the perennial discom financial issues. The scheme that was structured to ensure the participation of states and discoms was at that point looked upon as the best solution. However, four years later, the skeletons which hid for some time, are again out of the closet. This time, uncovering all its failures in one go.
According to data available at praapti.in, as of August 2019, the distribution companies owed Rs 781.6 billion to the generation companies as against Rs 478.77 billion in the same period last year. This is after the 60-day grace period offered to discoms by the generators. The outstanding includes the overdue amount of 600.71 billion, which was Rs 346.01 billion in the same period in 2018.
To cite an example, in a state like Tamil Nadu, the delay in payments to renewable energy generators (wind) is almost 23 months. It is an understated problem because not all are getting reported.
The glaring question here is what went wrong and where?
Power industry analysts point out the inherent issues of discoms, such as incompetence and inability, have led to the current situation.
Pankaj Batra, Project Director, Integrated Research and Action for Development (IRADe) who has seen the evolution of the electricity segment very closely, enumerated the flaws that led the SEBs to the current levels. The former ex-Chairperson & Member Planning of Central Electricity Authority (CEA), pointed out, "Basically it is a governance issue. Governance needs to improve. Some parameters have improved, such as the aggregate technical & commercial (AT&C) losses are coming down for almost all states. But that needs to be maintained. Many of the states have signed agreements under the "Power for All" initiative and agreed to reduce losses according to a particular trajectory. I am not sure whether they are reducing as per that trajectory, but they are decreasing."
Power sector analysts resonated with the same opinion. Kameswara Rao, Leader, Energy, Utilities & Mining, PwC said, "The tariff reforms which should have taken place have not happened. Regulators failed to do that. Utilities should have invested because they got breathing space to improve their performance, but they did not do so. Governments also could have taken advantage of it and put some of this into private operation."
In a recent interview with INFRASTRUCTURE TODAY, Raj Kumar Singh, Minister of State (Independent Charge), Power & New and Renewable Energy indicated that the concerns regarding SEBs required to be addressed on a priority basis. He felt that for sustainable economic growth, making power available at an affordable cost was a vital factor. For this, he said India would roll out the pending tariff revision.
He, however, added, "UDAY has improved the system, curtailed losses, but we still have quite a distance to cover. So, we are coming up with a new reform package. You can call it UDAY-II or whatever! Now, grants will be made conditional upon states implementing reforms and reducing losses. So, we will be helping states in strengthening the system, i.e., for aerial cables, smart metering or in whatever else they need. But that money will only be released when they meet the loss trajectory. The grant of loans from Power Finance Corporation (PFC) and REC Ltd will also be contingent on meeting the trajectory."
The key challenges are efficiency improvement and tariff revision. It is not one against the other, but steps are required for both simultaneously. In the majority of the states, it is a backlog of many years. What was not paid in the past years is still to be paid. That means there will be a significant burden.
According to Batra, "There is the fundamental question of adequate revenue for state distribution companies since most of them are making losses. Private distribution companies are doing much better. SEBs have to install energy management systems like Supervisory Control and Data Acquisition (SCADA), smart meters and energy audit systems. This was mandated in the Tariff Policy of January 2016, with two years for installation. The specified time is over. Only some state distribution companies have installed these. These are required for tracking theft of power on a real-time basis."
He further emphasised, "Separation of carriage and content and partial privatisation was looked at one point. The distribution system can be one, but the suppliers can be many who can compete with one another. Whoever maintains the system has to ensure the plugging of leakages. They have to prevent theft. But with the distribution system remaining with the state government, I am not sure how much they will be able to stop theft, because it is in the physical distribution system where theft takes place."
Criticality of Efficiency
Firstly, improving efficiency is critical in the current situation. The government as a first step should look at putting all these networks to private sector progression. It is a proven fact that wherever private operators were brought in, whether it is Mumbai, Delhi, Ahmedabad, Surat or Kolkata, the efficiency showed significant improvement. The government should, therefore, look at creating an environment that is less regulated or controlled to ensure private participation in franchises.
Secondly, the government needs to be far more open in allowing competition. Today, electricity is extremely controlled, and essentially discoms' real money comes from industries. A lot of consumers continue to be below cost with subsidised power and free power. This is hurting the industry. The best way to address this is to allow competition.
Thirdly, tariff reforms. It will not be a challenge if the tariffs are revised every year in a phased manner by covering retail inflation. The salaries of employees go up every year. There is a revision in the cost of fuel (coal) every year. As people are aware of cost escalation, in general, it will be easier for them to understand the tariff hikes if they are undertaken regularly.
Fourth is to find the right planner, who can look at more consciously what is the cost of energy and how it can be made affordable.
- LIZA V
Snapshot of UDAY Scheme
States shall take over 75 per cent of DISCOM debt as on September 30, 2015 over the next two years.
States will issue non-SLR including SDL bonds in the market or directly to the respective banks/financial institutions (FI)s holding the discom debt to the appropriate extent.
Discom debt not taken over by the state shall be converted by the banks/FIs into loans or bonds with interest rate not more than the bank's base rate plus 0.1 per cent. Alternately, this debt may be fully or partly issued by the discom as state-guaranteed discom bonds at the prevailing market rates, which shall be equal to or less than bank base rate plus 0.1 per cent.
States shall take over the future losses of discoms in a graded manner and shall fund them as follows:
State discoms will comply with the Renewable Purchase Obligation (RPO) outstanding since April 1, 2012.
States accepting UDAY and achieving operational milestones will be given additional funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such schemes.
Such states shall also be supported with additional coal at notified prices and, in case of availability through higher capacity utilisation, low-cost power from NTPC and other Central Public Sector Undertakings (CPSU)s.
States not meeting operational milestones will be liable to forfeit their claim on IPDS and DDUGJY grants.
UDAY is optional for all States. However, states are encouraged to take the benefit at the earliest as benefits are dependent on the performance.