Winds of Change

A slew of distribution segment reforms on the anvil

One of the government’s top agendas for the power sector is distribution segment reforms. In a strong move, the Ministry of Power (MoP) has recently mandated discoms to open and maintain a letter of credit (LC) as a payment security mechanism for gencos. This is following the continued delays in making payments by discoms to gencos, leading to liquidity constraints for the latter. The central government also plans to soon notify amendments to the Tariff Policy, 2016 regarding imposition of penalties on discoms for unscheduled power cuts or voluntary load shedding. In addition, the Union Budget 2019-20 promises to remove barriers like cross-subsidy surcharges, and undesirable duties on open access sales or captive generation for industrial and other bulk power consumers. Further, with the performance of the Ujwal Discom Assurance Yojana (UDAY) being evaluated for the three-year period ended March 2019, a revamped scheme is also under works as proposed in the Union budget. Power Line presents an update on the distribution segment’s performance and progress …

Operational performance

The distribution network has been growing at a steady pace. As per India Infrastructure Research estimates, the aggregate distribution line length and transformer capacity stood at about 10.9 million ckt. km and over 780,000 MVA, respectively, as of March 2018. The total energy sold by discoms in 2017-18 was estimated at 880 billion units (BUs). Meanwhile, the consumer base is estimated to be over 260 million as of March 2018.

The aggregate technical and commercial (AT&C) loss levels for the UDAY participating states declined from 20.8 per cent in 2015-16 (base year) to 18.29 per cent in 2018-19 as against the target of 15 per cent envisaged by March 2019. Only 11 out of 28 states/union territories had AT&C losses less than 15 per cent in 2018-19 (see figure). These were Andhra Pradesh, Dadra & Nagar Haveli, Himachal Pradesh, Gujarat, Daman and Diu, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and Uttarakhand. States including Jammu & Kashmir, Meghalaya, Goa, Bihar and Uttar Pradesh recorded high AT&C losses between 25 per cent and 50 per cent in 2018-19. As per the latest data on the UDAY portal, AT&C losses stood at 24.55 per cent as of August 2019 (as per unaudited/provisional data submitted by nine states on the portal).

On a positive note, the gap between average cost of supply (ACS) and average revenue realised (ARR) has reduced. The gap ranged from Re -0.02 per unit (for Gujarat) (minus indicates a revenue surplus) to Rs 2.55 per unit (Jammu & Kashmir) in 2015-16, while it ranged from Rs -1.21 per unit (Puducherry) to Rs 2.13 per unit (Jammu & Kashmir) in 2018-19. Six states (Gujarat, Haryana, Karnataka, Maharashtra, Puducherry and Rajasthan) reported a revenue surplus in 2018-19. Overall, the ACS-ARR gap came down from Re 0.59 per kWh in 2015-16 to Re 0.17 per kWh in 2017-18. As of August 2019, the ACS-ARR gap stood at Re 0.37 per unit (as per unaudited/provisional data submitted by eight states on the portal).

Financial performance

The total income of discoms increased from Rs 4,841 billion in 2016-17 to Rs 5,506 billion in 2017-18, an increase of nearly 14 per cent. Almost 42 per cent (Rs 182.73 billion) of the total incremental income was due to an increase in energy consumption over the year. Further, the total expenditure increased by 8.4 per cent, from Rs 5,219.58 billion in 2016-17 to Rs 5,656.24 billion in 2017-18. The book losses of discoms have also shown notable improvement, owing largely to debt restructuring done under UDAY, reduction in AT&C losses and an increase in tariff rates. The losses declined by more than 60 per cent in 2017-18 to stand at around Rs 150.5 billion as compared to Rs 378.77 billion in 2016-17.

Meanwhile, the average power purchase cost (APPC) stayed constant at Rs 4.20 per unit between 2016-17 and 2017-18. While the APPC went down on the back of coal linkage rationalisation, shutting down of old and inefficient generating units, better compliance of merit order despatch, and overall performance improvement of state gencos, most of this was offset by factors that led to an increase in the cost. These factors include increase in prices of domestic as well as imported coal, increase in railway freight charges and volatile short-term power prices. However, some states such as Chhattisgarh, Jharkhand, Telangana, Haryana, Meghalaya, Himachal Pradesh, Punjab, Uttar Pradesh, Goa and Gujarat have registered a decline in their APPC.

Key recent developments

In July 2019, the Ministry of Power (MoP) issued an order directing discoms to offer an LC as part of the payment security mechanism in power purchase agreements (PPAs). Accordingly, the National Load Despatch Centre and regional load despatch centres have been directed by the MoP to “dispatch power only after it is intimated by the generating company and the distribution companies that LC for the desired quantum of power has been opened and copies made available to the concerned generating company”. Discoms do not need the LC for state generation companies as per a clarification issued by the ministry later. The provision came into effect from the billing cycle beginning August 1, 2019. As per ICRA, the ministry’s direction is positive for gencos, given that this will result in an improved payment pattern from discoms. However, the implementation of these provisions remains to be seen, given the challenges in securing the large quantum of LCs by discoms, in view of their loss-making operations in the majority of states. This measure is also facing resistance from state governments, given that the non-provision of LCs would lead to supply curtailment, and, in turn, load shedding in the distribution licence area.

The power ministry has recently stated that the government is planning to seek cabinet approval for the draft tariff policy. The policy is expected to provide penalties for load shedding, impose restrictions on allowing losses of more than 15 per cent as a pass-through in tariff, limit cross-subsidies, suspend licences in case of non-availability of adequate power supply arrangements, and provide a framework to separate the carriage and content operations of discoms. The government is also working on the issue of regulatory assets and has written to the Appellate Tribunal for Electricity for the same.

In a first-of-its-kind exercise, a National Perspective Plan at the distribution level is being prepared by the Central Electricity Authority. Till now, the central government had been preparing perspective plans for the generation and transmission segments under the National Electricity Plan (NEP). The distribution plan would keep consumers’ needs at the centre of its focus, the power ministry stated. The plan anticipates an increase in distribution substation capacity of 38 per cent and in distribution transformation capacity of 32 per cent as well as an increase in feeder lengths of 27-38 per cent till 2022.

In September 2018, the MoP proposed amendments to the Electricity Act, 2003. Among the key provisions related to power distribution are the switch to direct benefit subsidy from subsidies in tariff, separation of distribution and supply of electricity in order to encourage competition, and imposition of a penalty on distribution companies failing to provide 24×7 power supply.

In June 2019, power sector behemoths Power Grid Corporation of India Limited and NTPC Limited came together to form a joint venture (JV) for undertaking distribution operations. The JV, the National Electricity Distribution Company (NEDC), has been set up on a 50:50 equity participation basis. The main aim of the NEDC is to undertake electricity distribution and related activities in the states and union territories.

Further, in January 2019, Maharashtra awarded distribution franchises for two circles – one to Torrent Power for the Mumbra-Shil-Kalwa region and the other to CESC Limited for the Malegaon region.

The way forward

Going forward, many reforms are expected in the distribution segment with the aim of instilling financial prudence and improving operational performance. The MoP is planning to direct key power sector lenders like the Power Finance Corporation to follow prudential norms at par with banks for lending to discoms. There would be no provision of working capital loans, only short-term or long-term credit. So, if a discom is incurring losses and not improving efficiency, then lending to them will be restricted. In addition, flagship schemes like the Integrated Power Development Scheme and Deendayal Upadhyaya Gram Jyoti Yojana may be linked with incentives and disincentives, that is, funds will be disbursed only if discoms meet certain operational and financial targets. Net, net, discoms should brace themselves for the winds of change expected in the coming months.

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