Policy Wise: India’s Power Sector

How to improve the financial picture of the DisComs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Schemes for DisComs

Mains level : Paper 3- Financial issues faced by the DisComs

The article analyses the factors responsible for financial difficulties faced by the DisComs and suggests the ways to deal with the issues.

Important role of the DisComs

  • Distribution Companies (DisComs) are the utilities that typically buy power from generators and retail these to consumers.
  • For all of India’s global leadership for growth of renewable energy, or ambitions of smart energy, the buck stops with the DisComs.
  • The days of scarcity of power are over.
  • The physical supply situation has mostly improved.
  • But the financial picture has not brightened much.

Analysing the data on liabilities of the DisComs

  •  ₹90,000 crore (later upgraded to  ₹1,25,000 crore) was earmarked for DisComs in ₹20-lakh crore package announced in the wake of Covid-19’s economic shock.
  • 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.
  • It also showed similar Other Current Liabilities.
  • DisComs have delayed their payments upstream (not just to generators but others as well) — in essence, treating payables like an informal loan.

But why do DisComs not pay on time?

  • Ideally, DisComs should not incur losses as they enjoy a regulated rate of return.
  • While AT&C losses can explain part of any gap. Major reasons are as discussed below:

1) Regulatory issue and cash-flow gap due to it

  • The first problem starts at the regulatory level where even if DisComs performed as targeted, across India, they would face a considerable cash flow gap.
  • This cash flow gap was ₹60,000-plus crore in FY18-19 compared to their then annual cost structure of ₹7.23-lakh crore.

2) Payabeles issue: Due from consumers, state and regulatory gap

  •  These dues are of three types.
  • First, regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets,which are to be recovered through future tariff hikes.
  • Second, about a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments.
  • Third, consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.
  • State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.

3) Challenge of renewable energy

  • The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage.
  • And as battery technologies mature, their dependence on DisComs may wane entirely.
  • Even without batteries, regulations permitting, they may want to find third party suppliers under competitive models.

Impact of Covid pandemic

  • COVID-19 has completely shattered incoming cash flows to utilities.
  •  The revenue implications were far worse since the lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments.
  • 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.

Way forward

  • We will probably need 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.
  • We need a complete overhaul of the regulation of electricity companies and their deliverables.
  • We need to apply common sense metrics of lifeline electricity supply instead of the political doleout of free electricity even for those who may not deserve such support.
  • For the rest, regulators must allow cost-covering tariffs.

Consider the question “Examine the factor responsible for making the DisComs financial unviable? Sugget the pathways to deal with the issues faced by the DisComs”

Conclusion

The financial problems of DisComs have been brewing for many yearsHowever, if business as usual was not even good enough before COVID-19, it will not be workable for the current national needs of quality, affordable, and sustainable power.

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