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Review: DISCOMs and the many issues they face

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Under the Atmanirbhar Bharat package, the central government announced a ₹ 90,000 crore liquidity support for DISCOMs which have been hit hard by the COVID-19 lockdown. The issues faced by DISCOMS are not new. Here is a review. 

To address the financial challenges being faced by power distribution companies or DISCOMs, governments over the years have taken up various initiatives, the latest being the Ujwal DISCOM Assurance Yojana, popularly known as UDAY Scheme, launched in 2015. As industries and commercial establishments which are the main source of revenue for the DISCOMs were shut during the nation-wide lockdown, the fiscal health of the already ailing DISCOMs has worsened further. To mitigate some of the problem of DISCOMs, structural reforms in power sector were announced by the Finance Minister as a part of the Atmanirbhar economic package.

There are three main processes that run the power sector

Power generation, transmission, and distribution are the three main processes involved in the power sector.

First, electricity is generated in thermal, hydel, or nuclear power stations. India’s installed capacity for power generation recorded a compounded annual growth rate (CAGR) of 8.9%, an increase from 124 GW to 344 GW between 2006 and 2018. India is now the third largest electricity generator in the world. 

The generated electricity is then transported over hundreds of kilometres to load centers using transmission lines and transmission towers to supply power to consumers. This stage connects electricity producers and end-consumers. Transmission has taken rapid strides in India, with a CAGR of 7.2% between fiscals 2012 and 2018, raising India’s transmission line capacity to 3.9 lakh ckm (circuit kilometre). 

The third stage which involves the distribution of power to all the consumers across the nook and corner of the country is where the DISCOMs come into the picture. These are predominantly owned by the state governments. Private DISCOMs are also operational in India but are limited to a few cities such as Tata Power Delhi Distribution Ltd and Reliance Energy Ltd in Mumbai. The distribution sector continues to be the weakest link in India’s electricity value chain due to multiple reasons- low tariffs, huge aggregate technical and commercial losses, poor investments in infrastructure, indebtedness, poor maintenance, and outdated networks.  

Multiple reforms have been announced by different governments to lift ailing DISCOMs

Financial reforms were introduced from time to time. In 2001, a bailout package was announced for State Electricity Boards with the objective to help reduce their debts. ₹ 35,000 crores worth debt was converted into state government bonds and 50% of the interest outstanding was waived off. In 2012, during the UPA, a financial restructuring package was announced by the then government in order to save the DISCOMs from becoming Non-Performing Assets (NPAs) in banks because of slippages in repayment of loans. This was expected to reduce the financial stress on DISCOMs and financial institutions. However, the DISCOMs continued to report losses. 

UDAY scheme was launched in 2015

To help the debt-ridden state owned DISCOMs revive, the Central Government launched the voluntary Ujwal DISCOMs Assurance Yojana (UDAY) scheme in 2015. The objective of the scheme was to improve the operational and financial efficiency of the DISCOMS. For this, a substantial debt (75%) of the state owned DISCOMs was to be taken over by the states. Only by relieving the DISCOMs of the huge debt burden could the government’s programs such as 100% rural electrification and 24*7 power supply could be achieved. 

Loss of DISCOMs is calculated as Aggregate Technical and Commercial Losses, abbreviated as AT&C Losses, which reflects both-

  • loss due to energy loss during transmission and distribution (technical reasons), theft, and inefficiency in billing, 
  • commercial loss such as inefficiency in collection, and default in payment.
Source: National Power Portal

There has been a slight reduction in AT&C loss in the last seven years

Data from Lok Sabha and from Rajya Sabha answers reveals that the AT&C losses at the national level have dropped from 25.48% in 2012-13 to 18.19% in 2018-19. Between 2016-17 and 2018-19, the AT&C loss has continuously reduced each year. However, it has to be noted that data for certain big states like Delhi. Odisha & West Bengal is not available for the year 2018-19 as per the Rajya Sabha answer which may slightly increase the reported 18.19% losses in 2018-19. 

The enrolment in the UDAY scheme is voluntary, implying that states can choose whether or not they wish to avail the benefits of the scheme. Despite the voluntary nature of the scheme, a total of  32 States/UTs have currently enrolled under UDAY. Odisha, Delhi, and West Bengal are not a part of the scheme as yet. 

In 2018-19, many states have reported the least loss in seven years

As per the 2018-19 data for AT &C losses, six of the states with greatest loss percentage are Mizoram, Jammu and Kashmir, Sikkim, Meghalaya, Jharkhand and Madhya Pradesh. Mizoram’s DISCOMs have reported AT&C loss of more than 68%, which is more than three times the loss reported in the previous year. Even though the losses in Jammu and Kashmir, Meghalaya and Sikkim are higher compared to other states in 2018-19, the loss reported in these states is among the lowest in the last seven years between 2012-13 & 2018-19. Meanwhile, in Jharkhand, the AT & C losses have reduced in the last three years, but in Madhya Pradesh, the losses in 2018-19 are the highest in seven years. 

In 2018-19, a total of 12 states and union territories reported  AT& C losses of less than 15%, as per UDAY scheme target. Himachal Pradesh has had the least loss in 2018-19 with only 8%. In fact, the loss as reported by the DISCOMs in the states of Himachal Pradesh, Goa, Kerala, Telangana, Punjab, and Gujarat, is the least in seven years. Andhra Pradesh too has been reporting less than 20% loss consistently in the last seven years. 

Although some states have maintained their loss below 20%, the large power consuming states such as Maharashtra, Uttar Pradesh, and Madhya Pradesh, are far from reaching the targets under UDAY. 

DISCOMs have been severely hit by the COVID-19 lockdown

The nation-wide lockdown due to COVID-19 was imposed from 25 March 2020. As a result of lockdown, operations of commercial establishments and industries came to a grinding halt, which are the major source of revenue for DISCOMs. Domestic consumption of electricity increased during this period as people were confined to their houses. With the easing of lockdown restrictions, commercial spaces and industries are gradually re-opening. However, the loss because of lockdown is huge because of cross subsidy that DISCOMS traditionally provide. Agricultural consumers and domestic consumers pay a lower tariff which is compensated by a higher tariff for commercial & industrial establishments. With the lockdown being near complete for about 2-months, DISCOMS revenue took a huge beating. 

Under Atmanirbhar Bharat, government announced a liquidity injection of ₹ 90,000 crores 

The Finance Minister announced a liquidity injection of ₹ 90,000 crores for DISCOMs for clearing their outstanding dues. 

Source: PIB

Furthermore, a Tariff Policy Reform taking into consideration the consumer rights, as well as to promote industries and sustainability will be released. The government has also proposed the privatization of power departments in union territories for improving their operational and financial efficiencies. However, the draft 2016 National Tariff Policy already covers some of these points. Some of these changes may be made operational with the Electricity Amendment Bill, 2020’. However, as explained by FACTLY earlier, some states have been vehemently opposing this amendment. 

Source: PIB

Root cause of the issue needs to be addressed

DISCOMs have been facing severe losses for many years despite the various reform measures. Considering the inability of past reforms and bailout packages in reforming DISCOMs, it is high time the governments address the root cause. For starters, billing and payments needs to be more efficient. The billing by physical visits has been severely affected due to COVID-19. Smart meters have to made mandatory throughout the country to overcome these operational losses. Governments have to make their share of payments to DISCOMs for the cross-subsidies offered. Experts have suggested way forward for the DISCOMs as sector is poised for massive structural changes. These also have to be looked into by the governments. 

Featured Image: UDAY Scheme

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