India’s Power Distribution Sector Needs Further Reform: IEEFA

Coal Insights Bureau

Power distribution is the weakest link in the entire value chain of the Indian power sector, Institute for Energy Economics and Financial Analysis has said in a latest report.

While headwinds are affecting the power sector as a whole, such as electricity demand slowing in tandem with the recent deceleration in economic growth, the distribution of power continues to fail as it has done for many years, primarily due to the flailing state-owned power distribution companies (Discoms), Vibhuti Garg, Energy Economist with IEEFA said in a report.

“Various government reforms have been initiated to improve the sector’s commercial viability and performance, but are yet to make a sizeable dent. Discoms continue to incur huge financial losses. Absence of competition, economically inefficient tariff setting processes, lack of modern technology and infrastructure development are adding to those losses,” the report said.

India has set ambitious long-term targets for its electricity sector, including 450 gigawatts (GW) of renewables by 2030, representing a total of 55 percent of planned capacity.

Financial health of Discoms

For the country to achieve its ambitious renewable targets and sustain its economic growth goals, the crippled power distribution sector must be made profitable. IEEFA found Discoms are struggling under massive debt to the thermal power sector. There is currently upwards of $100 billion of non-performing or stranded assets shared between Discoms and the thermal coal- and gasfired power plant sectors. The dire financial health of state owned Discoms means these companies do not have the capital available to invest in technology and the much-needed modernisation of the national grid.

Discoms are increasingly reducing power received from energy generators, including from zero marginal renewable energy projects they are contractually bound to take. Some of the state Discoms are also forcibly renegotiating legally contracted tariffs, and are failing, once again, to meet long outstanding payments to renewable energy generators.

This situation is increasing the risk for renewable energy generators and their financial backers, restricting them to participate only in bids for which they can raise the capital cost for setting up new domestic energy capacity to meet energy demand growth.

Reforms failed to reframe distribution sector

In order to help state owned Discoms pare their mounting losses, the central government has offered financial packages to bail out beleaguered state electricity Discoms from time to time.

In 2012, the Government of India approved the Financial Restructuring Plan, aimed at improving the financial long term viability of state Discoms.

Then in 2015, the GoI’s Ministry of Power launched the Ujwal Discom Assurance Yojana (UDAY) scheme to improve the transparency, operational and financial performance of Discoms with the clear objective of reducing losses.

The UDAY scheme was effective in bringing down Discom financial losses and improving the national average AT&C losses in both FY17 and FY18.

The gap between cost of supply and average revenue realised also dropped materially during this period.

However, in FY2018/19, the tariff gap rebounded, and aggregate losses were nearly double that recorded in the previous year on account of increased rural connection under the Saubhagya scheme and state inability to reduce high aggregate technical and commercial (AT&C) losses. All up, the discom reforms have not gone far enough. Aggregate national discom losses resumed their upward trajectory in 2019.