The Indian power distribution sector, which is viewed as the weakest link in the power value chain, is set for yet another bailout of sorts. On July 20, 2021, the Ministry of Power (MoP) released an office memorandum of the reforms-based and results-linked Revamped Distribution Sector Scheme (RDSS). This followed the approval of the Cabinet Committee on Economic Affairs (CCEA) scheme on June 30, 2021. The RDSS has an outlay of Rs 3,037.6 billion including an estimated central government grant of Rs 976.3 billion. This is in line with the announcement by the finance minister in this year’s union budget. In fact, this is the fourth time that the central government has come out in support of the distribution segment since 2000, in addition to the financial packages provided by it from time to time. According to the MoP, the central government has invested Rs 2 trillion in various distribution schemes.
Similar to the previous reform schemes, the latest one seeks to improve the operational efficiency and financial sustainability of state discoms and power departments, which are reeling under heavy losses, by providing conditional financial assistance for strengthening the supply infrastructure. Notably, the aggregate discom losses (on a subsidy received basis) increased from Rs 336 billion in 2017-18 to Rs 614 billion in 2018-19. While these came down somewhat to Rs 528 billion in 2019-20, they are still significantly higher than the 2017-18 levels. The shortfall in subsidy realised, which is one of the key factors contributing to the losses, has also went up substantially, from Rs 41 billion in 2017-18 to Rs 193 billion in 2019-20. The other main reasons for discom losses are high aggregate technical and commercial (AT&C) losses (which currently stand at over 20 per cent) as well as the gap between the average cost of supply (ACS) and the average revenue realised (ARR) (at Re 0.51 per unit), which has increased over the years due to the rise in power purchase costs without corresponding provisions for their recovery through tariffs. Although the UjwalDiscom Assurance Yojana (UDAY), the central government scheme launched in 2015 to improve the financial and operational efficiency of state discoms, had some positive impact on discom performance, the net results have not been in line with the targeted trajectory (of reaching 15 per cent AT&C losses and zero ACS-ARR gap by 2019).
Under the latest scheme, central assistance will be based on meeting pre-qualifying criteria and achieving basic minimum benchmarks by discoms (excluding private sector power distribution companies), evaluated on the basis of an agreed evaluation framework tied to financial improvements. The five-year scheme, available till 2025-26, will be implemented based on the action plan worked out for each state rather than a “one-size-fits-all” plan. An inter-ministerial monitoring committee will be formed under the chairmanship of the secretary, MoP, for implementation of the scheme, including approval of operational guidelines, sanction of discoms’ action plans and detailed project reports (DPRs), as well as review and monitoring of the scheme’s progress. REC Limited and the Power Finance Corporation (PFC) have been designated as the nodal agencies for facilitating its implementation. Broadly, the scheme aims at the installation of 250 million smart meters, separation of 10,000 agricultural feeders and the replacement of 400,000 kilometres of overhead lines, among other things.
Power Line presents the key features of the new scheme…
The RDSS aims to improve the operational efficiency and financial sustainability of discoms through four key objectives:
- Reduction in AT&C losses to pan-Indian levels of 12-15 per cent by 2024-25
- Reduction in the ACS-ARR gap to zero by 2024-25
- Developing institutional capabilities for modern discoms
- Improvement in the quality, reliability and affordability of power supply to consumers through a financially sustainable and operationally efficient distribution segment.
The scheme will have two key parts – Part A, comprising metering and distribution infrastructure works, and Part B, comprising training and capacity building as well as other enabling and supporting activities. All the ongoing approved projects under schemes such as the Integrated Power Development Scheme (IPDS), the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and the Prime Minister’s Development Package (PMDP)-2015 (for the union territories [UTs] of Jammu & Kashmir and Ladakh) would be subsumed in this scheme. The savings in their gross budgetary support (GBS), amounting to about Rs 170 billion, would be a part of the total outlay of the new scheme under the existing terms and conditions till their sunset on March 31, 2022. The funds under these schemes would be available for the identified projects under the IPDS and for the approved ongoing projects under the PMDP, the IPDS and DDUGJY till March 31, 2023.
Eligibility for funding
The scheme envisages an annual appraisal of discom performance against predefined performance trajectories, including AT&C losses, ACS-ARR gap, infrastructure upgrade performance, consumer services, hours of supply and corporate governance as agreed to in the action plan. As per the office memorandum released by the MoP, the action plan has to be formulated by discoms and approved by the state government before filing with the central government for funding. The action plan must be structured in two parts: an analysis of the reasons for the losses and the steps required for loss reduction; and the work plan for loss reduction and further strengthening of the distribution system. In addition to the action plan, discoms need to submit DPRs for the scheme components as a part of their application. The state governments and their respective discoms would need to sign a tripartite agreement with the central government prior to availing of the scheme benefits.
The results evaluation framework would be formulated by the monitoring committee and will comprise two components – pre-qualifying criteria and result evaluation matrix. Discoms have to score a minimum of 60 per cent in the result evaluation matrix and clear a minimum bar in respect of certain parameters to be eligible for funding under the scheme in that year. The evaluation matrix would comprise parameters relating to financial stability (ACS-ARR gap, AT&C loss, etc.), outcome of infrastructure works (hours of supply, SAIFI, DT failure rate), progress in Part A works, and policy and structural reforms. Meanwhile, the key pre-qualifying criteria include the following:
- Publication of quarterly unaudited accounts within 60 days of the end of each quarter (45 days from the third year onwards)
- Publication of audited annual accounts by the end of December (end of September from the third year onwards)
- Creation of no new regulatory assets in the latest tariff determination cycle
- 100 per cent payment of subsidy for the previous year and advance payment of subsidy up to the current period by the state government
- Payment of current dues by all government departments
- Progress commensurate with the commitment to cover government offices with prepaid meters
- Number of days payable to creditors equal to or less than the projected trajectory
- Tariff order for the current year and true-up of penultimate year issued and implemented with effect from April 1 of the current fiscal year.
Part A: The key components of Part A include metering, feeder segregation, modernisation of the distribution system in urban areas and system strengthening in both urban and rural areas.
Metering: Under this component, around 250 million prepaid smart meters are planned to be installed for all consumers except agricultural consumers during the scheme period. Priority will be given to all 500 Atal Mission for Rejuvenation and Urban Transformation (AMRUT) cities (with a population of over 100,000 with notified municipalities); UTs; industrial and commercial consumers including micro, small and medium enterprises (MSMEs); government offices (at the block level and above); and high-loss areas. Prepaid smart metering will be implemented in public-private partnership (PPP) mode. In addition to improving discoms’ operational efficiencies, it would enable consumer empowerment as smart meters would allow them to monitor their electricity consumption regularly instead of on a monthly basis, which can help them in regulating their electricity usage as per their needs. Further, communications-based advanced metering infrastructure (AMI) meters are proposed to be installed on all feeders and DTs to enable energy accounting, leading to better planning for loss reduction by discoms. Considering the distributed nature of agricultural connections, which are mostly located remotely, such connections are proposed to be covered only through feeder meters.
The scheme lays significant emphasis on smart metering. Artificial intelligence (AI)is proposed to be leveraged to analyse data generated through information technology/operational technology (IT/OT) devices including system meters and prepaid smart meters to prepare system generated energy accounting reports every month to enable discoms to make informed decisions on loss reduction, demand forecasting, time-of-day (ToD) tariff, renewable energy integration and for other predictive analysis. Funds under the scheme would also be used for the development of applications related to the use of AI, machine learning (ML) and blockchain technology in the distribution segment. This is expected to promote start-ups in the distribution segment across the country.
Feeder segregation: The scheme also focuses on funding feeder segregation to improve electricity supply for agricultural consumers and for providing cheap daytime electricity to them through the solarisation of agricultural feeders. The scheme converges with the Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM), which aims to solarise all feeders, and provide avenues for additional income to farmers. Specifically, feeder separation works for 10,000 agricultural feeders would be taken up at an investment of Rs 200 billion under the scheme. This is expected to be beneficial to farmers who would get access to dedicated agricultural feeders providing them reliable and quality power.
Distribution modernisation in urban areas: The scheme proposes the implementation of supervisory control and data acquisition (SCADA) in all urban areas and distribution management system (DMS) in 100 urban centres. In addition to the above, the draft guidelines include a project management component that covers the cost of the discom-appointed project management agency (PMA) for DPR preparation, tendering, monitoring and results evaluation, among other things. Further, it mentions that PMA costs must be restricted to 1 per cent of the project cost, beyond which costs would have to be borne by the respective discoms or state governments.
Part B: There are four key components under Part B, all of which will be covered through 100 per cent GBS, except the consultancy support. The first is the augmentation of Power Grid Corporation of India Limited’s Smart Grid Knowledge Centre (SGKC) including AI. The SGKC was developed with assistance from the IPDS. An amount of Rs 300 million has been allocated under the RDSS for expansion of the centre’s activities. The second component, with an allocation of Rs 200 million, is the institution of training programmes and awards and incentives, which will be finalised by the monitoring committee. Third, the scheme will provide consultancy support for reform implementation. The consultancy support provided by the MoP to the UTs for privatisation of power departments under the Aatma Nirbhar Bharat Abhiyan will also be funded out of this component. Finally, this part will also cover the nodal agency fee, MoP enabling activities such as communication plans and consumer awareness, and PMA charges. An amount of Rs 10 billion has been for allocated for the last part.
Funding and disbursement
For prepaid smart metering, a grant of Rs 900 or 15 per cent (Rs 1,350 or 22.5 per cent for special category states) of the cost per consumer meter, whichever is lower, will be available to the states. Discoms can avail of an additional special incentive of 50 per cent of the above grants for the deployment of the targeted number of prepaid smart meters by December 2023. For works other than smart metering, the maximum financial assistance given to discoms will be 60 per cent of the approved cost (90 per cent for special category states). Special category states include the north-eastern states including Sikkim, Himachal Pradesh and Uttarakhand, as well as the UTs of Andaman & Nicobar Islands, Lakshadweep, Jammu & Kashmir, and Ladakh.
Metering is to be carried out in totex (capital expenditure plus operational expenditure) mode. Costs that are not covered by the grant (about 85 per cent) are expected to be financed through an improvement in billing and collections. Further, the state may provide budgetary support. In the PPP model, the PPP partner could provide metering services through the design-build-fund-own-operate-transfer or other similar modes. For other infrastructure works under Part A, the state government or discom has to provide counterpart funding.
The way forward
The MoP is expected to issue detailed guidelines for the implementation of the scheme separately. The administrative and governance mechanisms to make the scheme operative will be put in place in coordination with all the involved stakeholders. Meanwhile, some states have already started preparing themselves to avail of the scheme. For instance, in June 2021, Maharashtra State Electricity Distribution Company Limited released a request for proposal for the appointment of a PMA for the preparation of DPRs and action plans, and review the progress of the work as per the action plan for metering and distribution infrastructure under the scheme.
Electricity distribution is the cash centre for all upstream activities of the power sector and needs to be fixed urgently as the sector prepares to take the next step forward with greater integration of renewables, growth of distributed generation, rapid adoption of electric vehicles and charging infrastructure as well as changing consumption patterns. As electricity is on the concurrent list, states have been wary of losing control over the distribution segment through full-fledged privatisation. That said, it is in the interest of states to ensure a commercially vibrant distribution segment, which will have a ripple effect on the states’ economic activities. The central government has offered yet another opportunity for the distribution segment to climb out of the red and become financially viable. It is paramount that the preconditions of the scheme are honestly met by the states and discoms, and the targets are achieved in a time-bound manner.