Distribution Aid: Significant investment backed by policy initiatives to power the segment

Significant investment backed by policy initiatives to power the segment

The Covid-19 pandemic has exposed widespread challenges faced by the power distribution segment, the weakest link in the power sector. The poor financial and operational performance of discoms characterised by high aggregate technical and commercial (AT&C) losses, mounting discom debt and high book losses were already hampering the growth of this segment. The already cash-strapped discoms are now in a dismal state, given the loss of revenue due to a decline in the power demand during Covid-induced lockdowns. Further, the billing and collection efficiency of discoms was hit adversely during the lockdown, widening the gap between the average revenue realised (ARR) and the average cost of supply (ACS).

Various policy measures have been in discussion to reform this segment. The government had announced a Rs 1,200 billion liquidity infusion scheme for discoms under the Aatmanirbhar Bharat Abhiyan and privatisation of power distribution in the union territories (UTs) to help the ailing segment. Under the Union Budget 2021-22, the government has announced a Rs 3 trillion scheme for five years to reform the power distribution segment. The major features of the proposed scheme include prepaid smart metering, feeder separation and upgradation system. Further, a framework will be put in place to give consumers alternatives to choose from more than one distribution company.

Power Line takes a look at the key trends and developments in the power distribution segment…

Operational performance

As per India Infrastructure Research, between 2015-16 and 2019-20, the total distribution line length grew at a compound annual growth rate (CAGR) of 4.82 per cent to reach 12.45 million ckt. km as of March 2020. The majority of the distribution line length (around 60 per cent) is at the low tension level, followed by 31 per cent at the 11 kV level and the remaining at the 33 kV level. As of March 2020, nearly 718 GVA of transformer capacity was operational at the 33 kV level and below, across 36 utilities in the country. Between 2015-16 and 2019-20, the transformer capacity has grown at a CAGR of 7.15 per cent.

The total member of electricity consumers was estimated to be around 287 million (based on the data for 53 utilities) as of March 2020, with the domestic category accounting for the largest consumer share, at nearly 78 per cent of the total consumers. Further, during 2019-20, the total energy sales in the country stood at 1,005 billion units (BUs), as against 709 BUs in 2012-13. Consumer category-wise, domestic consumers accounted for 32 per cent of the total sales during 2019-20, followed by industrial (30 per cent), agricultural (21 per cent) and commercial (9 per cent) consumers. In fact, the share of industrial consumers in energy sales declined from 35 per cent in 2012-13 to, while the share of domestic consumers increased from 26 per cent.

In the past five-year period, all-India AT&C losses have witnessed a declining trend. As per the Power Finance Corporation’s (PFC) report on state power utilities’ performance of 2018-19, AT&C losses stood at 22.03 per cent, as against 23.96 per cent in 2015-16. During 2019-20, India Infrastructure Research estimated AT&C losses (based on the average of AT&C losses across 36 discoms) to be around 20.46 per cent.

AT&C losses continue to be higher than the 15 per cent target set under the Ujwal Discom Assurance Yojana (UDAY). Notably, over the years, discoms have undertaken several initiatives towards network strengthening and theft reduction, among other things, which are likely to have had a positive impact of lowering AT&C losses. However, the electrification drive under the Pradhan Mantri Sahaj Bijli Har Ghar Yojana, especially in the rural and far-flung areas, is likely to have a negative impact on AT&C loss levels. Besides this, the gap between the ACS and ARR for distribution utilities increased and reached Re 0.52 per kWh in 2018-19 from Re 0.30 per kWh in 2017-18. According to an analysis by Emkay Global Financial Services, the Covid pandemic is expected to further increase the ACS-ARR gap 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 commercial and industrial (C&I) segment, a decline in payment collection and lower cross-subsidisation.

Financial performance

According to PFC’s report on state power utilities’ performance, losses of distribution utilities in India declined from Rs 338.94 billion in 2016-17 to Rs 294.52 billion in 2017-18, thereafter rising again to reach Rs 496.23 billion in 2018-19. With lockdown restrictions, there has been a significant drop in revenue from C&I consumers since March 2020. As per ICRA’s estimate, discom losses are expected to remain high at around Rs 489 billion during 2019-20. The loss is projected to increase sharply to Rs 921 billion during 2020-21, if the revenue gap estimate is not allowed as a regulatory asset.

The aggregate discom debt declined from about Rs 2.75 trillion in 2014-15 to Rs 1.56 trillion in 2016-17 – an absolute decline of about 43 per cent, owing to state governments taking over the discom debt under UDAY. However, the debt is estimated to have increased by 18 per cent to Rs 1.85 trillion in 2017-18 and further by 23 per cent to Rs 2.28 trillion in 2018-19 (as per CRISIL’s analysis of discoms in 15 states, which account for 85 per cent of the aggregate losses). The increase in debt can be attributed to delays in structural reforms such as cost-reflective tariffs and inability to reduce AT&C losses to targeted levels, besides a rise in government departments’ dues to discoms. As per CRISIL, the debt is estimated to reach Rs 2.64 trillion in 2019-20.

The Covid impact

The Covid-19 pandemic and subsequent lockdowns have significantly impacted power demand in the country. During April 2020-August 2021, power demand witnessed a decline of 11.1 per cent over the corresponding period of the previous year, largely due to the decline in power demand from the high-tariff paying C&I consumers. Further, the discoms’ billing and collection efficiency was adversely affected, besides delays in revenue collection.

With the gradual lifting of the lockdown and resumption of certain economic activities, the monthly power demand reduction subsided and energy consumption recorded an increase in September 2020, after a gap of six months since March 2020. Energy consumption recorded a growth of 7.1 per cent from September 2020 to March 2021 over the corresponding months of the previous fiscal. Overall, 2020-21 saw a decline of 1.1 per cent in energy consumption over that in 2019-20.

The widening revenue gap of already cash-strapped discoms has impacted their ability to pay power generators. The total dues owed by discoms to generators stood at Rs 1,026.84 billion in February 2021, an increase of 17 per cent over the previous year. Further, the total overdue amount of discoms, which was not cleared even after a grace period of 45 days offered by generators, stood at Rs 915.49 billion in February 2021, as against Rs 738.67 billion in February 2020. According to analysts, the overdue level is likely to remain high in 2020-21 due to the expected rise in under-recovery and slow loan disbursement under the Aatmanirbhar Bharat Abhiyan. Besides, with the outbreak of the pandemic, a number of discoms invoked the force majeure clause under their power purchase agreements, claiming exemption from the obligation of purchasing power and making necessary payments.

Smart meters, offering remote monitoring and reading facilities, came as a major relief for discoms during the lockdowns. Discoms with smart meters registered much better billing efficiency and revenue collection.

Recent developments

Liquidity injection package for discoms: In order to tide over the liquidity problems of the power sector, exacerbated by the outbreak of the Covid-19 pandemic, the central government announced a liquidity infusion scheme as part of the Aatmanirbhar Bharat Abhiyan on May 13, 2020. The Rs 900 billion liquidity package for discoms, to help them pay their dues till March 2020, was later enhanced to Rs 1,250 billion, factoring in these utilities’ outstanding dues till June 30, 2020 and further to Rs 1,350 billion. Under the scheme, loans are extended to discoms by REC Limited and PFC at concessional rates to clear their liabilities to central public sector generation companies, transmission companies and Coal India Limited. Of the total sanctioned amount of Rs 1.35 trillion, REC and PFC have so far disbursed loans worth Rs 788.55 billion to state-owned power distribution companies. The major beneficiaries of the scheme are Uttar Pradesh, Rajasthan and Andhra Pradesh.

Privatisation of UTs: In addition to the financial stimulus package, the government made certain key reform announcements under the fourth set of the Covid economic package of the Aatmanirbhar Bharat Abhiyan. One of them was the privatisation of power distribution in UTs, which would act as a model at the pan-India level. Deloitte has been appointed to help privatise discoms in Puducherry, Chandigarh and the Andaman & Nicobar Islands, while SBICap will be assisting in privatising discoms in Dadra & Nagar Haveli, Daman & Diu, Jammu & Kashmir and Ladakh.

In February 2021, Torrent Power emerged as the highest bidder for acquiring a 51 per cent stake in the discom in Dadra & Nagar Haveli and Daman & Diu. In March 2021, the Bombay High Court suspended auction for the same, after a public interest litigation was filed against the privatisation of the discom. Meanwhile, seven companies are in the fray for the power discom privatisation exercise in the UT of Chandigarh. These include Sterlite Power, ReNew Wind Energy, NTPC Electric Supply Company Limited, Adani Transmission Limited, Tata Power, Torrent Power, and Eminent Electricity.

Tariff policy: The government has also proposed a new tariff policy. This tariff policy proposes key reforms such as direct benefit transfer for subsidy, installation of smart prepaid meters, progressive reduction of cross-subsidy, consumer rights and regulatory assets.

Draft Electricity (Amendment) Bill 2020: In April 2020, the Ministry of Power (MoP) released the draft Electricity (Amendment) Bill 2020. Some key provisions for discoms are the engagement of franchisees or sub-distribution licensees to distribute electricity without any separate licence from the state commission; the state government would pay the subsidy directly to any specific category of consumers and the state regulator would determine the retail tariff without any subsidy; setting up of Electricity Contract Enforcement Authority to settle matters related to the sale, purchase and transmission of electricity.

Electricity (Rights of Consumers) Rules 2020: In December 2020, the MoP notified the Electricity (Rights of Consumers) Rules 2020, laying down minimum standards of service for power supply to consumers across the country. The rules mark a paradigm shift in policy planning in the power sector by putting consumers at the centre. The rules provide for penalties of up to Rs 100,000 on distribution companies for gratuitous load shedding and delay in the grant of a new connection or addressing a faulty meter. As per these rules, a new connection has to be given within a maximum time period of seven days in metro cities, 15 days in other municipal areas and 30 days in rural areas. The rules also stipulate that discoms must supply power on request from the occupier of any premises and that a minimum standard of service is consumers’ right. Also, discoms have to supply power 24×7, except for areas such as agriculture, where continuous power is not required. Discoms are also required to put in place systems, preferably automated, for monitoring and restoring outages. The rights of consumers’ rules also introduce a new category of consumers that would also generate power (prosumer), besides maintaining the consumer status and having the same rights as general consumers.

Rs 3 trillion reform-linked power distribution scheme: The finance minister has announced a Rs 3,059.84 billion scheme for five years to reform the country’s power distribution segment as part of the Union Budget 2021-22. The scheme will provide assistance to discoms for infrastructure creation, including prepaid smart metering and feeder separation, and upgradation of systems tied to financial improvements. The condition to get funds is that discoms will have to bring down financial losses to zero. For this, discoms will have to work out a tangible plan to reduce losses over four to five years and get states’ approval for it, to get funds for strengthening distribution systems. The scheme will help eliminate the need for a human interface in metering, billing and collection through smart meters. Other focus areas will be energy accounting, are feeder and transformer metering.

Framework to choose power distribution companies: The Union Budget 2020-21 also called for putting in place a framework for allowing the choice of electricity supplier to consumers from among more than one discom. With this, the government plans to delicense distribution, as it had delicensed generation in 2003. The existing distribution companies will continue to function, but will be open to competition. Any company can now take up distribution anywhere. The objective is to empower consumers and do away with discom monopolies. It aims to give consumers choices, by removing restrictions.

Issuance of tariff orders before April 1: Recently, the central government has asked the state electricity regulatory commissions (SERCs) to issue tariff orders for distribution licensees before April 1 of the tariff year and report compliance to the MoP by May 31, every year. This aims to ensure the timely determination of power tariffs by SERCs, as mandated under the legal provisions of the Electricity Act 2003 and the Tariff Policy, 2016. In the past, there has been a significant delay in the issuance of tariff orders by some SERCs, which led to the creation of regulatory assets as a matter of routine. This not only negatively impacts the financials of distribution licensees and their business sustainability, but is also prejudicial to public interest as discoms do not have enough money to buy power or maintain the distribution system.


Net, net, power distribution is expected to receive significant investments in the coming years, backed by various government schemes. The National Infrastructure Pipeline estimates an investment of Rs 3,019.07 billion during 2020-21 to 2024-25 in the segment. Network strengthening and modernisation, smart metering and implementation of IT initiatives are likely to be the key focus areas. Going forward, implementing policy measures to promote private participation, lowering network losses and enhancing financial viability of discoms are steps in the right direction and are likely to yield positive results.

Nikita Gupta