DISCOM sector in India: Challenges & solutions – Explained, pointwise

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

Distribution is done by the Distribution Companies (DISCOMs) which connect power producers to the households. They are the interface between utilities and the consumers.

Under the Indian Constitution, power is a concurrent subject and the responsibility for distribution and supply of power to rural and urban consumers rests with the states.

Hence, DISCOMs are predominantly owned by the state governments. Private DISCOMs are also operational in India but are limited to a few cities like Delhi and Mumbai. Government of India provides assistance to states through various Central Sector / centrally sponsored schemes for improving the distribution sector.

Since many years, most power distribution companies in India are incurring losses every year.

Due to these accumulated losses and various other reasons the condition of DISCOMS in India is quite fragile.

What are the challenges being faced by the DISCOMs in India?

High AT&C losses: The precarious financial position of DISCOMs is due to the high level of aggregate technical and commercial (AT&C) losses, the levy of inadequate or lesser tariffs when compared to the cost of power supply, and insufficient subsidy support from state governments.

Their annual losses are estimated to be around 45,000 to 50,000 crore and the overall debt is around 6 lakh crore.

The figure for AT&C loss in India, as per Min. of Power, was 18-19% in 2019.  In countries such as UK and US, it is about 6-7%.

Note: AT&C loss reflects the loss due to energy loss during transmission and distribution (technical reasons), theft, and inefficiency in billing and commercial loss such as inefficiency in collection, and default in payment.

Determination of tariffs: One major factor impacting the health of DISCOMs is the determination of the tariffs. There are frequent delays in the tariff determination process.

Poor financial health: Power distribution companies collect payments from consumers against their energy supplies (purchased from generators) to provide necessary cash flows to the generation and transmission sectors to operate. Due to the perennial cash collection shortfall, often due to payment delays from consumers, Discoms are unable to make timely payments for their energy purchases from the generators.

According to the most recent government data, discoms’ payment arrears are now nearly $14 billion. A fifth of this are claims of renewable energy producers.

This overhang limits their ability to pay on time, forcing them to run up operational debt to electricity suppliers and transmission firms.

Further, this gap/shortfall is met by borrowings (debt), government subsidies, and possibly, through reduced expenditure. This increases the Discoms’ cost of borrowing (interest), which is inevitably borne by the consumer.

Lack of metering: Minimizing the AT&C losses is critical to improve the operational efficiency of Discoms. However, even six years after UDAY was launched, various levels in the distribution chain (the feeder, the distribution transformer (DT) and the consumer) have not been fully metered. As a result, it difficult to isolate and identify loss-making areas and take corrective action.

Decrease in revenue generation owing to the Pandemic: Revenue from industrial and commercial users is used to cross-subsidize other consumers. However, owing to the Pandemic the demands from industrial and commercial users is falling. This has led to stress on discom finances.

Absence of political consensus at the state level to raise tariffs: Many states report losses as they could not eliminate the gap between power costs and revenue. For instance, recently, Opposition parties in Karnataka recently protested against a tariff hike of 30 paise.

The Centre’s “Electricity for all” programme have contributed to greater inefficiency. Because, to support higher levels of electrification, cost structures need to be reworked. Similarly, the distribution network (transformers, wires, etc) need to be augmented. In the absence of such measures, losses are bound to rise.

Emergence of alternative sources of energy and resultant decline in cross-subsidy tariff: DISCOMs were able to charge higher tariffs from commercial and industrial consumers to cross-subsidize agricultural and low-income households. However, high-tariff paying consumers are migrating to alternative sources of energy like solar. This is happening due to two reasons: an increase in funding at national and global level towards cleaner options and secondly, the average cost per unit for commercial and industrial consumers has dropped considerably.

This reduced reliance of high tariff paying consumers on DISCOMs will only worsen their already weak financial position.

What are the implications of a weak DISCOM sector in India?

A fragile state of DISCOMs in India will lead to various other problems:

Difficulty in achieving the new climate targets: India will struggle to meet its bold target of raising non-fossil-fuel generation capacity—including hydroelectric and nuclear power—to 500 gigawatts by 2030, up from roughly 150 gigawatts now. At COP26 meeting, India had recently committed to use non-fossil-fuel sources for half of its energy needs by 2030.

What key schemes have been launched by the Govt to address the DISCOM problem?

Various steps have been taken by the govt to resolve the problems being faced by the DISCOMs:

UDAY Scheme: Launched in November 2015, the Ujjwal DISCOM Assurance Yojana (UDAY) was designed to turn around the  financial position of state distribution companies (DISCOMs). The state governments took over 75 % of the debt of their DISCOMs, issuing lower-interest bonds to service the rest of the debt. In return, DISCOMs were given target dates (2017-19) to meet efficiency parameters like reduction in power lost through transmission, theft and faulty metering. The scheme was not successful in fulfillling its objective.

Reforms-Linked, Result-Based Scheme for Distribution (RLRBSD): In budget 2021-22, the Union government had announced the launch of a “reforms-based and results-linked” scheme for improving the financial health and operational efficiency of discoms. Under the scheme, AT&C losses will be brought down to 12-15% by 2025-26, from 21-22%. Operational efficiencies of discoms will be improved through smart metering and upgradation of the distribution infrastructure, including the segregation of agriculture feeders and strengthening the system.

What is the way forward?

DISCOM Restructuring: Only 10% of India’s population is served by private distribution licensees. Hence, good Corporate Governance and higher private participation in distribution hold out the possibility of greater efficiency.

Regulatory Reforms: The state governments should promote autonomy, competence and transparency of the State Electricity Regulatory Commission (SERC). Depoliticisation of DISCOMs is a must.

Operational Reforms: The overall AT&C loss figure in India is high. Many discoms need to improve their billing efficiency through better and smart metering.

Renewable Energy Integration Reforms: DISCOMs need to prepare to accommodate an increasing amount of renewable energy (RE), from generators as well as prosumers.

Managerial Reforms: Effective reforms such as easily accessible call centres, convenient bill payment facilities can help reduce customer dissatisfaction and increase revenue. Moreover, Performance incentives can also help align discom employees to the interests of the organisation.

The creation of a national power distribution company to ensure procurement of electricity at competitive prices.

While errant billing and collection, the other aspect of high cost can be partially solved by renewable power, especially solar. A low-cost robust solar panel manufacturing industry in India will lead to lower cost of power for DISCOMs. As the share of solar power increases, the cost for DISCOMs will come down.

Privatisation of DISCOMs: It is an experiment that has yielded positive results in many cities, including Delhi, Mumbai, Kolkata and Ahmedabad. Before it was privatised in 2002, AT&C losses in the national capital were at a high 53% and the government was subsidising discoms to the extent of Rs 12,000 crore every year. After privatisation losses came down, and today Delhi has one of the lowest AT&C losses among DISCOMs in the country at just 8 per cent.

Electricity Amendment Bill 2021: The bill seeks to delicense power distribution to reduce entry barriers for private players for creating competition in the segment, which would ultimately enable consumers to choose from multiple service providers. This will result in a stiff competition to existing DISCOMs thereby forcing them to clean up their act and become operationally efficient.

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