Electricity distribution continues to be the weakest link in the power sector. High aggregate technical and commercial (AT&C) losses, poor billing and collection efficiencies and delays in tariff hikes have significantly deteriorated the operational and financial performance of distribution utilities over the years. Discoms, which were already reeling under heavy losses, have been severely impacted by the outbreak of the Covid-19 pandemic and the subsequent countrywide lockdown. A deep cut in power demand from high-tariff-paying commercial and industrial (C&I) consumers has further widened discoms’ revenue gap. As a relief measure for the sector, the central government has announced a Rs 900 billion liquidity infusion scheme for discoms under the Atmanirbhar Bharat Abhiyan, along with other reforms such as privatisation of power distribution in union territories and installation of smart prepaid meters.
As per India Infrastructure research, between 2014-15 and 2018-19, the total distribution line length grew at a compound annual growth rate (CAGR) of 4.11 per cent to reach 11.12 million ckt. km as of March 2019. The majority of the distribution line length (around 57 per cent) is at the low tension level, followed by 39 per cent at the 11 kV level and the remaining at the 33 kV level. As of March 2019, nearly 816 GVA of transformer capacity was operational at the 33 kV level and below, across 50 utilities in the country. This has increased at a CAGR of 7.57 per cent. The total number of electricity consumers is estimated to be around 278 million as of March 2019, with the domestic category accounting for the largest share at nearly 79 per cent of the total consumers.
On the energy sales front, in 2018-19, distribution utilities recorded total sales of 957.51 BUs, registering a year-on-year growth of 7.45 per cent. Statewise, Maharashtra accounted for the highest share in the gross energy sold at 11.65 per cent, followed by Uttar Pradesh at 9.2 per cent. Consumer-category-wise, during 2018-19, industrial consumers accounted for 29 per cent of the total sales, followed by domestic (28.01 per cent), agricultural (22.44 per cent) and commercial (9 per cent) consumers.
Besides this, the average cost of supply for distribution utilities increased by 8.75 per cent to reach Rs 6.09 per kWh in 2018-19. Meanwhile, the average revenue with subsidy received increased by 5.09 per cent and stood at Rs 5.57 per kWh in 2018-19. The revenue gap with subsidy received increased from Re 0.30 per kWh in 2017-18 to Re 0.52 per kWh in 2018-19. Meanwhile, the revenue gap with subsidy received excluding the revenue grant under the Ujwal Discom Assurance Yojana (UDAY) and regulatory income increased from Re 0.53 per kWh in 2017-18 to Re 0.72 per kWh in 2018-19.
As for AT&C losses, at the national level, the average losses improved from 22.33 per cent in 2017-18 to 22.01 per cent in 2018-19. Statewise, Arunachal Pradesh recorded the highest AT&C losses at 55.5 per cent, followed by Jammu & Kashmir at 49.94 per cent and Nagaland at 40.06 per cent. Meanwhile, Delhi recorded the lowest AT&C losses at 9.07 per cent, followed by Kerala at 9.1 per cent and Punjab at 11.28 per cent.
On the billing efficiency front, there was an improvement from 82.69 per cent in 2017-18 to 83.42 per cent in 2018-19. Meanwhile, collection efficiency deteriorated from 93.93 per cent to 93.49 per cent during the same period. With the Covid-19 outbreak and the imposition of social distancing norms, electricity distribution companies have not been able to physically collect electricity bills from consumers, leading to a dip in their cash flow. During this time, smart meter infrastructure, enabling remote meter readings, has come as a major relief for discoms. Discoms with smart meters have been able to record around 95 per cent billing efficiency, with a 15-20 per cent average increase in the monthly revenue per consumer during the Covid lockdown.
Financial performance of utilities
The aggregate losses of distribution utilities increased from Rs 294.52 billion in 2017-18 to Rs 496.23 billion in 2018-19, a deterioration of 68 per cent. Meanwhile, aggregate losses with subsidy received but excluding regulatory income and grant under UDAY stood at Rs 595.88 billion in 2017-18. During 2018-19, the highest profit after tax (PAT) was recorded by Maharashtra (Rs 19.16 billion), followed by Delhi (Rs 7.14 billion) and Punjab (Rs 2.72 billion). Tamil Nadu, Andhra Pradesh and Rajasthan were the worst in terms of performance with a negative PAT of Rs 179.62 billion, Rs 168.31 billion and Rs 125.24 billion respectively.
Impact of Covid-19
The Covid-19 outbreak and the subsequent lockdown led to power demand plummeting across the country, particularly from C&I consumers. In the past couple of months, all-India electricity demand has witnessed a gradual recovery. It stood at over 96 per cent of the pre-Covid level in July 2020 and further improved to nearly 98 per cent of the pre-Covid level in August 2020, mainly led by recovery in rural areas. However, in the April-June quarter of 2020-21, power demand witnessed a decline of 16.2 per cent over that in the corresponding period of the previous year. The fall in power demand, especially from the high-tariff-paying C&I consumers, and delays in cash collection from other segments have impacted discoms’ finances.
According to an analysis by Emkay Global Financial Services, the situation in the power sector demand will further increase the gap between the average cost of supply (ACS) and the average revenue realised (ARR) to Re 0.95 per unit in 2020-21 from Re 0.50 per unit in 2019-20, owing to a lower offtake by the C&I segment, a decline in payment collection and lower cross-subsidisation. This will lead to an under-recovery of Rs 1,127 billion in 2020-21 for discoms.
The widening revenue gap of cash-strapped discoms has already impacted their ability to pay generators. As per the Ministry of Power’s (MoP) PRAAPTI portal, the discoms’ overdue amount, as of July 2020, stood at Rs 1,172.63 billion, as against Rs 759.24 billion in July 2019. According to analysts, the overdue level is likely to remain high in 2020-21 due to the expected rise in under-recoveries and the slow progress of the Atmanirbhar Bharat Abhiyaan towards loan disbursement.
Besides this, a fallout of the pandemic was that a number of discoms invoked the force majeure clause under their power purchase agreements (PPAs), claiming exemption from their obligations of purchasing power under the PPA and making the necessary payments as per the PPA. Reportedly, discoms in UP, Punjab, Haryana, Telangana, Madhya Pradesh and Dadra & Nagar Haveli have invoked the force majeure clause for an indefinite period and asked private sector gencos with whom they have entered into PPAs, not to expect any payment till further notice. Although Solar Energy Corporation of India Limited has issued notifications to discoms, inforrming them that their force majeure claims will not be taken on board, certain discoms have continued to curtail power on grounds of a fall in revenue collection and effect on consumers’ capacity to pay bills amidst the lockdown.
Recent policy developments
Liquidity infusion scheme for discoms: The central government announced a Rs 900 billion mega liquidity injection for discoms as a part of the Rs 20 trillion stimulus package under the Atmanirbhar Bharat Abhiyan. This would be extended as loans by REC Limited and the Power Finance Corporation (PFC), aimed at clearing their liabilities to gencos. Funding under the liquidity infusion package would be done in two tranches of Rs 450 billion each. For the sanction and release of tranche 1, discoms are required to provide an undertaking stating that they would enable digital payments of electricity bills and self-assessment of electricity meters by consumers. Besides, state governments would provide an undertaking to liquidate the payments due to discoms on account of electricity dues of government departments in three annual instalments, to install smart prepaid or prepaid meters in government departments/ attached offices and to clear subsidy dues and put in place a system so that bills for subsidies are raised by discoms and paid upfront every quarter. Meanwhile, in order to avail of tranche 2 funding, discoms would be required to submit details of the implementation of undertakings given at the time of availing of tranche 1 and a plan, endorsed by the state government, to bring down losses over the next three to four years. This will involve steps to reduce theft and tighten the ACS-ARR gap.
As of September 16, 2020, loans aggregating to Rs 706 billion have been sanctioned and Rs 247 billion has been disbursed/released. Uttar Pradesh tops the chart for seeking the highest credit under the package at Rs 200 billion, followed by Telangana at Rs 120 billion and Karnataka at Rs 70 billion.
Recently, the Cabinet Committee on Economic Affairs has approved a one-time relaxation to PFC and REC Limited for extending loans to discoms above the limit of a working capital cap of 25 per cent of the past year’s revenues, under UDAY. With the relaxation allowed in the working capital limits, state discoms will be able to secure more loans from PFC and REC Limited to pay their power bills till June 2020. The one-time relaxation will be valid for one year and will help states that had hit the borrowing limit and were not able to avail of loans under UDAY. According to reports, Tamil Nadu is expected to be a key beneficiary of the move. Reportedly, TANGEDCO has sought a Rs 300 billion loan under the government’s liquidity package.
Meanwhile, states are now requesting the central government to enhance the liquidity package for discoms to Rs 1,250 billion from Rs 900 billion to cover losses up to June 2020, as against the outstanding discom dues to gencos up to March 2020 that wear covered earlier. In another advisory issued by the power ministry, all gencos and transcos have been advised to charge a late payment surcharge (LPS) at a rate not exceeding 12 per cent per annum (simple interest) on all payments made under the liquidity infusion scheme. The current applicable rate of LPS is quite high despite the fact that interest rates in the country have softened over the past few years. It goes up to 18 per cent per annum in some cases and has adversely impacted discoms.
Tariff reforms and privatisation of UTs: Apart from the financial stimulus package, the government made some key reform announcements under the fourth set of the Covid economic package of the Atmanirbhar Bharat Abhiyan. One of the key announcements was the privatisation of power distribution in union territories (UTs), which would act as a model for the privatisation of power distribution at the pan-India level. PFC has appointed Deloitte and SBI Capital Markets (SBICAP) as consultants to help with the privatisation process. Deloitte has been appointed to help privatise discoms in Puducherry, Chandigarh and the Andaman & Nicobar Islands; while SBICAP will be assisting in the privatisation of discoms in Dadra & Nagar Haveli, Daman & Diu, Jammu & Kashmir, and Ladakh. The MoP is planning to soon issue standard bidding documents for the privatisation process, which is expected to be completed by end 2020. Several local and international companies are expected to participate in the bidding process. The prospective bidders include NTPC, CESC Limited, Torrent Power, the Greenko Group, Tata Power, the Adani Group, Italy’s Enel Group, Malaysia’s Tenaga Nasional Bhd, Electricite de France SA, and Hong Kong’s CLP Group.
In addition to this, the government has proposed a new tariff policy laying down reforms such as direct benefit transfer (DBT) for subsidy, installation of smart prepaid meters, progressive reduction of cross-subsidies and ensuring timely payments to gencos.
Draft Electricity (Rights of Consumer) Rules, 2020: In a move aimed at introducing a corporate culture in discoms, the MoP has, for the first time, issued the draft Electricity (Rights of Consumers) Rules, 2020. The draft rules entitle consumers to a rebate on electricity bills that are not served on time and to a compensation from discoms upon failure to address grievances on time and upon non-achievement of the mandated supply quality; provide a timeline for the issue of new connections or modification of existing ones; and also mandates the use of smart/prepaid meters, among other things.
Draft Electricity (Amendment) Bill, 2020: In April 2020, the MoP released the draft Electricity (Amendment) Bill, 2020, which is the fourth draft of the bill. The draft bill proposes that discom can engage franchisees or sub-distribution licensees to distribute electricity on their behalf in a particular area within its supply zone without any separate licence from the concerned state commission, and providing information about it would be sufficient. Another provision of the draft electricity amendment bill is the promotion of cost-reflective tariffs. The draft proposes that the state regulator determine retail tariff without any subsidy allowed under Section 65 and the government pay the subsidy directly to any specific category of consumers. Besides this, the bill proposes restrictions on deferment of the revenue recovery and a reduction of cross-subsidy to bring in a cost-reflective and simplified tariff structure.
Apart from this, the draft bill proposes to strengthen the payment security mechanism by making it mandatory unless it is waived by parties to contract on their own. For open access to electricity, the draft bill proposes to include, along with other open access charges, charges for intra-state transmission and interstate transmission whereever applicable. Another key proposal of the draft bill is the setting up of an Electricity Contract Enforcement Authority, which will have the original jurisdiction to settle matters related to the specific performance of obligations under a contract pertaining to sale, purchase or transmission of electricity. The draft bill also calls for the provision of a DBT mechanism.
Other key provisions of the draft bill include expanding the scope of renewable purchase obligations (RPOs) to include hydropower purchase obligations (HPOs) and an increase in the penalty for violation of RPO and HPO targets. It also calls for drafting a National Renewable Energy Policy by the central government in consultation with state governments.
Reform-linked distribution scheme: The power ministry is in the process of formulating a new reform-linked scheme by merging the ongoing schemes, such as the Integrated Power Development Scheme and Deendayal Upadhyay Gram Jyoti Yojana. According to the MoP, the main objectives of the scheme are to improve power supply reliability and quality; enhance the financial and operational performance of utilities; and reduce AT&C losses to 12-15 per cent, and the ACS-ARR gaps to zero by 2024-25. The scheme entails demand-based infrastructure creation by state discoms contingent on the submission of action plans for improving operational and financial performance. Funds under the scheme would be released in proportion to the achievement by discoms against mutually agreed targets in the action plan.
Other sector developments
Bids for Odisha discoms: The Odisha Electricity Regulatory Commission (OERC) had issued notices inviting bids for selling licences of North Eastern Electricity Supply Company of Odisha Limited (NESCO), Western Electricity Supply Company of Odisha (WESCO) and SOUTHCO in 2019. Reportedly, Tata Power, CESC Limited and Adani Power have evinced interest in acquiring the distribution licences of these three discoms, and the selection of licences is currently under process. Earlier, Reliance Infrastructure Limited had management control over WESCO, NESCO and SOUTHCO, with 51 per cent stake in each of the utilities, before its distribution licences were cancelled by the OERC in March 2015. Since then, the utilities have been managed by state-owned GRIDCO Limited, which holds 49 per cent stake in these companies. Earlier, in May 2020, Tata Power took over the management of the Central Electricity Supply Utility of Odisha after completing the acquisition of a 51 per cent stake in the discom for a consideration of Rs 1.78 billion. The company received a letter of intent from the OERC for the distribution and retail supply of electricity in Odisha’s five circles (Bhubaneswar, Cuttack, Puri, Paradeep and Dhenkanal) for a period of 25 years with effect from June 1, 2020.
Award of new DFs: In another development, in July 2020, Feedback Energy Distribution Company Limited (FEDCO) emerged successful in securing distribution franchise (DF) contracts for four electrical divisions, Ambassa, Manu, Mohanpur and Sabroom, while Sai Computers has secured a DF contract for the Kailashahar electricity division in Tripura. As a part of the agreements, FEDCO and Sai Computers will implement advanced technologies to provide better services and increase operational efficiency in these areas.
CBIF for smart meters: The power ministry has begun the process of setting up of a Rs 20 billion joint venture (JV) for providing a common back-end infrastructure facility (CBIF) to discoms for a faster roll-out of smart meters. The JV would have four promoters, NTPC Limited, REC Limited, Power Grid Corporation of India Limited and PFC. The boards of PFC and REC have already approved equity investment of Rs 1.5 billion each in the JV for the CBIF. The CBIF will enable fast-track implementation of smart meters across the country. It will simplify smart meter roll-out for discoms by offering a plug-and-play architecture with standardised, pre-configured, pre-integrated, scalable back-end infra.
While there has been some recovery in power demand in the past one month or so, it is expected to remain subdued during 2020-21. The all-India electricity demand is likely to decline by 5-6 per cent in 2020-21 over that in the previous year, steeper than the 1 per cent decline forecast earlier, as per ICRA research. This would directly impact the discoms’ revenue gap, which is estimated to increase to Rs 420 billion-Rs 450 billion in 2020-21. Notably, the recovery of this revenue gap, if allowed through regulatory assets, would require a tariff hike of 2.5-3 per cent at an all-India level, assuming a three-year recovery period of regulatory assets. Besides this, mounting discom dues continue to be a cause of concern for the sector. As per the PRAAPTI portal, the discoms’ overdue amount to gencos stood at Rs 1,172.63 billion at the end of July 2020, and is expected to remain elevated for 2020-21.
That said, the liquidity package for discoms will improve cash flows and bring immediate relief to the sector. However, for the overall well-being of the distribution segment in the long term, the implementation of various reform measures such as DBT for the subsidy and installation of smart prepaid meters proposed by the central government under the new tariff policy as well as the enactment of proposed amendments to the Electricity Act, 2003 are vital.