Discoms still an area of darkness

Source: The post is based on the article “ Discoms still an area of darkness ” published in “ Business standard” on 15th July 2023.

Syllabus: GS 3 – Infrastructure ( Energy)

News: The revenues of electricity distribution companies (Discoms) in India have declined over a 12-year period, from 75% of total revenues in FY10 to 71% in FY22. This is despite government interventions to improve financial and operational efficiencies.

What are reasons for decline in the revenues of Indian Discoms?

Reduced consumer payment: According to a study by Prabhat Barnwal and Nicholas Ryan, the revenues collected from bill-paying consumers have declined from 75% of total revenues in FY10 to 71% in FY22.

Free or subsidized power: To cater to lower-income groups, several states are providing free or subsidized power. This has led to lesser revenue collection from consumers.

Less incentive for loss reduction: Power Finance Corporation data notes that there is little incentive for discoms to reduce losses as their primary focus is ensuring power supply across their grid.

What are the impacts of decline in the revenues of Indian Discoms?

Increased government subsidies: As consumer revenues decline, discoms have become heavily reliant on government subsidies and grants. This lead to a lack of financial discipline. For example, profits reported by two of Rajasthan’s discoms in FY22 were largely due to state subsidies and grants from the Ujjwal Discom Assurance Yojana (UDAY).

Pressure on industrial sector: The shortfall in consumer payments is often compensated by increasing the price of electricity for the industrial sector. This increases operational costs for industries.

Potential for service instability: With lower revenues, discoms face challenges in managing their operating expenses, servicing debts, and investing in infrastructure. This can potentially affect the quality and reliability of power supply.

Economic sustainability: The continuous decline in revenues and dependence on government support questions the fiscal sustainability of the power sector in the long run.

What are possible solutions for improving the finances of Discoms?

Open Access: Introduce competition among discoms. Allow consumers to choose their power provider, similar to the telecom sector.

Smart Metering: Implement smart meters across the country. As of June 2023, only 3% of consumers have a smart meter, but installation is increasing in states like Bihar, Assam, and Haryana.

Time-of-Day Metering: Encourage consumers to use power during non-peak hours by offering lower bills, thus balancing demand and reducing costs.

Reform measures: Implement various reform measures including fuel & power purchase adjustment surcharge (FPPAS) rules and ensure timely recovery of Government dues to improve the financial health of discoms.