India’s DisCom stress
Recently, 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 Distribution Companies (DisComs) and later it was upgraded to ₹1,25,000 crore.
Status of Discoms in India
- The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were ₹2,27,000 crore and this is well before COVID-19.
- The amount under the stimulus package for DisComs is provided by the government’s PRAAPTI (Payment Ratification and Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal.
- The portal shows for DisCom dues to generators but it is not widely appreciatedbecause the portal is a voluntary compilation of dues and is not comprehensive.
- The outstanding dues, as of June 2020, were the highest for the DISCOMS of Rajasthan, Tamil Nadu, Uttar Pradesh, Maharashtra, Telangana, Karnataka, and Jammu & Kashmir.
- The AT&C losses of DISCOMS at the all India level are at 20.22 per cent, which is significantly higher than the target of limiting the losses to 15 per cent by FY19.
- In August 2020, the Cabinet Committee on Economic Affairs approved a one-time relaxation to Power Finance Corporation and Rural Electrification Corporation for extending loans to DisComs above the limits of working capital cap of 25% of last year’s revenues.
Concerns associated with Discoms in India
- Discoms are the weakest link in the electricity chain: The Distribution Companies (DisComs) have been called the lynchpin but also the weakest link in the electricity chain.
- For all of India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs, the utilities that typically buy power from generators and retail these to consumers.
- Loan instead of economic stimulus package for DisComs: The recent study on DisComs shows a much graver picture than one that can be solved by a fill-up, even though such a liquidity injection is required.
- Outstanding Debt of DisComs to Power Generators: The media reports suggested that the DisComs owe one lakh crore rupees to generators, and without the financial infusion the electricity chain will collapse.
- Delay in upstream payments by DisComs: Over the years, the DisComs have delayed their payments upstream (not just to generators but others as well) i.e. treating payables like an informal loan.
- The state governments are the biggest defaulters and responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.
- The conventional wisdom blames the utilities for inefficiency, including high losses, called Aggregate Technical and Commercial (AT&C) losses.
- Non-trivial cash flow gap for DisComs: The problem for DisComs starts at the regulatory level where even if DisComs performed as targeted, across India, they would face a non-trivial cash flow gap, which was ₹60,000-plus crore in FY18-19 compared to their then annual cost structure of ₹7.23-lakh crore.
Impact of COVID-19 on Discoms
- Disruption of incoming cash flows to utilities: The equilibrium of increasing the dues as well as relying on continued subsidies, all worked as long as there was steady growth but the COVID-19 has completely shattered incoming cash flows to utilities.
- Multi-month dip in demand: The revenue implications were far worse since the lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments.
- The reduced demand for electricity did not save as much because a large fraction of DisCom cost structures are locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower offtake.
- Consumers unable to pay for electricity consumed: The revenues of power distribution companies have nosedived as people are unable to pay for the electricity consumed while power supplies have been maintained.
- Source of revenue for Discoms came to a grinding halt: The operations of commercial establishments and industries came to a grinding halt due to nationwide lockdown, which are the major source of revenue for DISCOMs.
- The agricultural consumers and domestic consumers pay a lower tariff which is compensated by a higher tariff for commercial & industrial establishments.
Measures to be adopted for Discoms in India
- Credible plans for liquidity infusion in DisComs: It is necessary to have a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt.
- Improvement in Aggregate Technical and Commercial (AT&C) losses: The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage and the improvement in AT&C losses is important.
- Overhaul of the regulation of electricity companies: It is required to have a complete overhaul of the regulation of electricity companies and their deliverables because much of inefficiency is tolerated in the name of the poor but they do not get quality supply.
- It is necessary to apply common sense metrics of lifeline electricity supply instead of the political dole-out of free electricity even for those who may not deserve such support.
- Transparency in off-budget liabilities of state: The transparency in the disclosure/reporting of off-budget liabilities in the State budgets could be the first step towards recognizing the guarantees as a medium-term fiscal risk.
- Privatisation of all electricity discoms in union territories: Unlike discoms in the states, which fall under the remit of the respective state governments, there is a separate dispensation for discoms in Union Territories, as they are administered directly by the central government.
Road ahead
- The financial problems of DisComs have been brewing for many years and it is unlikely that a silver bullet i.e. privatisation, can solve the problems overnight.
- The Centre’s decision to provide liquidity injection for the funds-starved electricity distribution companies (Discoms) is likely to ease the liquidity pressure in the Indian power sector and likely to benefit the consumers with continuity of uninterrupted power supply.
- The power sector liquidity is not expected to improve in the short term, as economic activity and power demand will take some time to pick up and there is an immediate need to infuse liquidity in the sector for continued power supply.
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