February 2021

Significant policy announcements have come in for the power distribution segment this month.

To begin with, the union budget has announced a reform-linked support scheme for discoms, with an outlay of Rs 3 trillion. On the lines of existing schemes such as the IPDS and the DDUGJY, the new scheme is also expected to provide assistance to discoms for infrastructure creation, inclusion of prepaid smart metering, feeder separation and upgradation of systems, and is likely to subsume all existing schemes. Thus, state discoms would get financial support and a longer window for turning around their performance.

To recall, just a few months ago, such a liquidity package of Rs 1.2 trillion (initially Rs 900 billion) was made available to discoms to pay generation companies in the wake of their inability to realise revenues, owing to the Covid-19 pandemic. This was the fourth such bailout package announced after its predecessor, the UDAY scheme, concluded in 2019-20 with most states failing to meet their stipulated targets. In fact, the financial and operational performance of state distribution companies – key developers of grids, purchasers of power and integrators of new technologies – continues to constrain capital availability, despite efforts such as UDAY, notes a new IEA report.

Further, the budget has drawn attention to the need for increasing alternatives for consumers, enabling them to choose their own discom. For this, the power ministry will soon circulate a draft bill proposing amendments to the Electricity Act, to omit the word “distribution licensee” in order to enable more competition in power distribution. This is undoubtedly path-breaking and the biggest reform the segment has seen, note industry observers.

This announcement carries forward the reform moves that the government has been making in the power distribution segment. Last year, the government had kickstarted the process of privatisation of discoms in union territories and issued draft standard bidding guidelines for it.

Meanwhile, in another recent development, the government has issued a notification to make discoms clear their dues on time. As per the new guidelines, discoms cannot delay paying their dues to gencos and transcos beyond one month, and will be penalised for any delays.

These are definitely bold moves. What will be crucial in implementing these reforms is the state governments showing strong political will to keep the power sector growth story intact. As the IEA notes, an $18 billion backlog of payments to generators emerged in 2020, and further reforms are required to enable distribution companies to return to profitability, including measures to achieve cost-reflective pricing.

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