Next Set of Reforms

The way forward for discoms

The fourth edition of the flagship Power Line Summit 2019 was held on October 23, 2019 at the ITC Maurya, New Delhi, to provide a top-level view of the road ahead for the Indian power sector. The summit saw a good mix of expert presentations and top-level panel discussions. It was well attended by key stakeholders of the power industry. The highlights of the key sessions have been curated in this special section.

In the opening panel discussion on “The Way Forward for Discoms”, Mritunjay Kumar Narayan, joint secretary, distribution, Ministry of Power; G. Raghuma Reddy, chairman and managing director, Southern Power Distribution Company of Telangana; Sanjay Banga, chief executive officer, Tata Power Delhi Distribution; and Sabyasachi Majumdar, senior vice president, ICRA, underlined the key issues and challenges in the power distribution segment, strategies and solutions needed to address them, and their outlook going forward. Excerpts…

Government perspective

The central and state governments have committed 24×7 power supply for all consumer segments and adequate power supply for the farming sector. At the state power ministers’ conference held recently, all states resolved to work together to fulfil this commitment.  The government’s objective to provide universal access to electricity has been met. All households have been connected in a very short span of time (barring a few thousands in the Naxal-prone area of Chhattisgarh).

Under the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and the Integrated Power Development Scheme (IPDS), aimed at strengthening the distribution and sub-transmission infrastructure, the central government has disbursed funds of around Rs 1,400 billion and significant work has been done. The Ujwal Discom Assurance Yojana (UDAY) has also been largely successful. Discoms reported losses of around Rs 510 billion in 2015-16. In 2018-19, these came down to Rs 270 billion, which is a big achievement. Aggregate technical and commercial (AT&C) losses have come down to 18.2 per cent, a more than 2.5 per cent drop. Over 20 states have shown improvement in AT&C reduction. The ACS-ARR gap for some discoms has been bridged, while as many as 18 states have been able to narrow the gap. Cumulatively, the gap was 60 paise when UDAY was introduced in 2015-16 and has come down to 27 paise. There has been some improvement, but there is still a long way to go.

State experience

With the implementation of UDAY and the takeover of 75 per cent of discom loans by the state governments, discoms’ position has improved. Significant investment has been made in infrastructure, which has improved the health of the discoms and increased supply hours significantly, particularly in rural areas.

When Telangana was formed in June 2014, the state experienced power cuts of four to eight hours a day. Within a year, the state was able to provide 24×7 reliable power supply to industrial and commercial and major consumers. Since March 2015, the state has been able to provide 24×7 three-phase supply to all consumers, excluding agricultural, and nine hours of supply to agricultural consumers. Telangana has also procured solar power to meet the peak demand and maintain the load curve, and issued solar tenders. It procured 500 MW of solar capacity in 2014, and another 2,000 MW of solar capacity in 2015, which had a distributed solar component, in a first for the state. However, the cost of renewable energy procurement is high in the state. Given that the state had gone for renewable energy procurement at an early stage, the cost per unit for renewables is around Rs 5.52 today as compared to a tariff of less than Rs 3 per unit in states that started procuring renewables later. This has raised challenges in RPO compliance.

(From left) Sanjay Banga, Chief Executive Officer, Tata Power Delhi Distribution; Mritunjay Kumar Narayan, Joint Secretary, Distribution, Ministry of Power; G. Raghuma Reddy, Chairman and Managing Director, Southern Power Distribution Company of Telangana; and Sabyasachi Majumdar, Senior Vice President, ICRA

Private participation in distribution

While the generation and transmission segments have done well with the introduction of private participation, the distribution segment is still with state discoms. After Tata Power took over Delhi’s distribution in 2002, the discom’s losses were brought down from 60 per cent to 7.4 per cent currently (first half of 2019-20). It took over the Ajmer circle two years back under the franchise model, resulting in a reduction of losses from 23 per cent to 8.6 per cent. It is, however, very unfortunate that after the privatisation of Delhi’s power distribution, there has been no attempt by any other state to privatise its distribution.

In order to bring private sector efficiency in the distribution segment, the government should now think not in terms of the franchise model or PPP model, but in terms of achieving overall sustainability of this sector. There are pros and cons of both the franchise and licensee models. The franchise model is just a contracting business and long-term network safety is not assured. After the contract expires, the network is left in a dilapidated condition. There is lack of a precedent for this model in the world. The focus of the contractor in this model will always be on collection efficiency, and not on consumers.

As opposed to this, the licensee model gives more incentive for investment and freedom to become more customer centric. That said, this model has one flaw. Distribution licensees often make investments just to obtain the 16 per cent post-tax return on equity. Such investments need to be checked prudentially with greater involvement of regulators. Another drawback of the privatisation model is that it would work only in the urban segments that have high-paying consumers. It may not be viable in a purely rural base that does not have a significant amount of input energy. That said, the decision with regard to which model is adopted will be taken by the state government.

Issues and concerns

A key area of concern is huge discom losses. In 2018-19, discoms incurred losses of around Rs 270 billion. If 24×7 supply has to be maintained, discoms need to bridge the ACS-ARR gap. Another challenge post UDAY is that while it has helped in extending supply hours for subsidised consumers, it has adversely impacted the discom balance sheet. Further, the SERCs are not fixing tariffs as per the national tariff policy as they continue to be controlled by state governments. This has impacted state discoms’ ability to pay bills to generators.  Another concern for states has been that funds sanctioned under government schemes like the IPDS and DDUGJY have not been proportional across all states.

Looking at the payment track record of discoms, the overall payment overdue to power gencos has remained high at around Rs 800 billion. Another concern is the dues from government departments. There are also PPA renegotiation issues in certain states. The states have expressed their intention of reopening PPAs.

Outlook

It is important to improve the efficiency of the distribution sector in order to achieve 24×7 power supply. There is a need to bring in the private sector, which is known for its efficiency as well as innovation. The ethos of public service has to be combined with the efficiency of the private sector. Power distribution is a concurrent subject and is largely under the state governments while the central government plays a supportive role. Discoms have to run on sound business principles if they are supplying power. In the long run, the tariff has to be reflective of the cost.

One of the big reforms being proposed in the new tariff policy is the introduction of the direct benefit transfer mechanism for subsidy disbursement to consumers. If the state governments want to give subsidy to a section of consumers, it has to be done through direct transfers. Significant penalties for load shedding have also been proposed. Also, consumers today do not have any choice in selecting a supplier. The amendments to the Electricity Act look into this issue. The wire business is essentially a monopoly business and there cannot be different suppliers laying supply networks. Thus, it has been proposed that if the network business is held by one entity, then using the same network, multiple suppliers can supply to different consumers. This will lead to more consumer choice.

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