The focus of policy reforms in the power distribution sector is on ensuring the financial viability and sustainability of distribution utilities. The flagship Revamped Distribution Sector Scheme (RDSS) is actively progressing, with a focus on enhancing the operational efficiency of discoms through initiatives such as network strengthening, smart metering and capacity building. Additionally, the implementation of the Late Payment Surcharge Rules has significantly improved the payment discipline of discoms.
The Ministry of Power (MoP) has set a target of eliminating the outstanding dues of discoms to generating companies (gencos) within the next four years. The annual integrated ratings and consumer service rating exercises play a crucial role in helping discoms assess their performance and take ownership of their actions. A highly anticipated future development is the enactment of the Electricity Amendment Bill, 2022. This legislation has provisions empowering consumers to choose from a variety of service providers, fostering sector competitiveness and introducing privatisation to the industry.
Emerging needs
There has been a heightened emphasis on renewable energy, spurred by the country’s commitment, announced at the COP26 summit, to achieving net zero emissions by 2070 and increasing non-fossil fuel power capacity to 500 GW by 2030. The technical challenges associated with integrating such a substantial renewable energy capacity include the intermittency, variability and unpredictability of renewable energy. These factors are expected to present challenges to grid operators in terms of forecasting and meeting the load.
Furthermore, the upcoming surge in rooftop installations will create more prosumers who are willing to sell electricity to the grid during the day, and draw electricity during off-peak hours. The complexity of electricity flows will also intensify with the growth of decentralised generation.
Additionally, due to the Faster Adoption and Manufacturing of Electric Vehicles in India (FAME) scheme, electric vehicles (EVs) have gained momentum. The increasing sales of EVs are being accompanied by a proliferation of EV charging infrastructure and battery storage solutions. In recent months, several discoms have undertaken EV charging projects across India. This underscores the importance of optimising electricity consumption and maintaining grid balance. Failure to align the network with these evolving requirements could result in grid instability, power shortages and blackouts. EV sales have grown considerably over the years – from 96,507 in 2017-18 to 1,183,381 in 2022-23, recording a compound annual growth rate (CAGR) of nearly 65 per cent. As per the FAME-II dashboard (accessed on December 14, 2023), the overall number of EVs sold in the country has reached 1,195,799. As of June 2023, there are a total of 8,738 operational public charging stations (PCSs) in the country. Studies being carried out by the Central Electricity Authority (CEA) to estimate the demand in 2031-32 have determined a provisional energy requirement of 69 billion units for EVs. Further, action plans for nine major cities have been prepared by the Bureau of Energy Efficiency for installation of PCSs. Going by the initial estimates, the target is to install a total of 46,397 PCSs in these cities by 2030.
Within the distribution segment, challenges such as theft, pilferage, meter tampering, high technical and commercial losses, and financially unsustainable operations highlight the growing need for effective network management. In the increasingly competitive environment, distribution utilities must adopt robust network management strategies. Such an approach would not only ensure 24×7 supply of reliable and high-quality electricity at reasonable rates to consumers, but also contribute to the reduction of losses. Additionally, modernising the distribution network through the introduction of technologies can facilitate demand-side management and enhance revenue protection.
A key challenge for power utilities in expanding their T&D network is right of way (RoW). To optimise RoW utilisation in congested urban and semi-urban areas and difficult terrain, utilities are adopting higher voltage systems, multi-circuit towers for stringing circuits, and new-age technologies such as high voltage direct current systems and gas-insulated switchgear. Moreover, with the expansion of EV charging infrastructure, power quality concerns such as brownouts, voltage issues and harmonics are also increasing. The quality of supply and services significantly impacts the perception and satisfaction level of customers. With increasing digitalisation and customer-focused business practices in other sectors, customer expectations for electric utilities have also increased.
Network growth and operational performance
The distribution network has been growing steadily, in terms of line length and transformer capacity. As per Power Line Research, the line length and transformer capacity at voltage levels below 33 kV or 66 kV have grown at CAGRs of about 3.8 per cent and 7.6 per cent respectively, between 2017-18 and 2021-22. As of March 2022, the distribution line length stands at about 13.9 million ckt. km and around 902 GVA of transformer capacity is operational at the 33 kV level. The majority of the line length and transformer capacity is below 33 kV voltage level.
As per the Power Finance Corporation’s “Report on the Performance of Power Utilities 2023”, the aggregate losses of distribution utilities decreased from Rs 465.21 billion in 2020-21 to Rs 310.26 billion in 2021-22. Meanwhile, the tariff subsidy released by the state governments as a percentage of tariff subsidy billed by distribution utilities increased from 84 per cent in 2020-21 to 109 per cent in 2021-22. The revenue gap on tariff subsidy billed basis decreased from Re 0.38 per kWh in 2020-21 to Re 0.23 per kWh in 2021-22, while the gap on tariff subsidy received basis, excluding regulatory income and revenue grant under Ujwal Discom Assurance Yojana for loan takeover, improved significantly from Re 0.69 per kWh to Re 0.15 per kWh.
The total outstanding debt of distribution utilities increased from Rs 5,825.47 billion as on March 31, 2021 to Rs 6,179.28 billion as on March 31, 2022. With regard to outstanding discom dues, as per the PRAAPTI portal (accessed on December 5, 2023), the total dues of discoms to gencos comprised balance legacy dues of Rs 643.74 billion and current dues of Rs 365.81 billion. This is a significant decline from the total outstanding dues of Rs 1.38 trillion in June 3, 2022, when the Late Payment Surcharge Rules were notified, providing a one-time relaxation to discoms whereby the outstanding amount was frozen, to be repaid in monthly instalments over 12-48 months.
On the operational performance front, aggregate technical and commercial (AT&C) losses fell to 16.42 per cent in 2021-22, almost 6 per cent lower than 2020-21 and 4 per cent lower than 2019-20 levels. During 2021-22, Arunachal Pradesh registered the highest AT&C losses at 48.89 per cent, whereas Dadra & Nagar Haveli and Daman & Diu reported the lowest AT&C losses at 3.77 per cent for the same period. AT&C losses further reduced to 13.5 per cent (provisional) in 2022-23. This was driven by improvement in collection efficiency, which increased from 92.71 per cent in 2019-20 to 97.25 per cent in 2021-22. Meanwhile, billing efficiency remained constant at about 85 per cent during the same period.
Recent developments
Electricity (Second Amendment) Rules, 2023: In July 2023, the MoP notified the Electricity (Second Amendment) Rules, 2023, detailing measures to improve the financial health of discoms by streamlining the process of accounting, reporting, billing and payment of subsidy by states. The new rules mandate that a quarterly report be submitted by the distribution licensee within 30 days of the end date of the respective quarters, and that the state commission examine and issue the report within 30 days of its submission. The report will, inter alia, cover findings regarding demands for subsidy based on accounts of the energy consumed by the subsidised categories, the subsidy payable to these categories as announced by the state government, and the actual payment of subsidy in accordance with Section 65 of the Act.
Electricity (Rights of Consumers) Amendment Rules, 2023: In June 2023, the MoP notified the Electricity (Rights of Consumers) Amendment Rules, 2023. Through this amendment, the ministry introduced the time-of-day (ToD) tariff and rationalised smart metering provisions. Under the ToD tariff system, the tariff during solar hours of the day shall be 10-20 per cent lower than the normal tariff, while it will be 10-20 per cent higher during peak hours. The ToD tariff will be applicable from April 1, 2024 for commercial and industrial consumers with a maximum demand of 10 kW and above, and from April 1, 2025 for all other consumers. Further, all types of smart meters shall be read remotely at least once a day, while other prepayment meters shall be read by an authorised representative of the distribution licensee at least once in every three months.
Guidelines for Medium and Long-term Power Demand Forecast: In August 2023, the CEA released extensive guidelines to forecast the energy demand in the medium and long terms from discoms, states and union territories. The guidelines aim to facilitate realistic assessment of future electricity demand from discoms/states by the CEA in its Electric Power Survey of India, aligned with the methodology followed at the central level. It will also serve as a guiding document for such an assessment with respect to new and emerging market segments such as EVs, solar rooftop and green hydrogen.
Guidelines for Resource Adequacy Planning: In June 2023, the MoP issued guidelines for the resource adequacy planning framework for India, in consultation with the CEA. The guidelines are meant to ensure that sufficient electricity is made available by putting in place a framework for advance procurement of resources by discoms, to meet electricity demand in a cost-effective manner. The guidelines also suggest that at least 75-80 per cent of the total capacity required by discoms be secured through long-term contracts, with medium-term contracts suggested for 10-20 per cent. The remaining power demand can be met through short-term contracts.
Update on RDSS
The reforms-based and results-linked RDSS has an outlay of Rs 3,037.58 billion over five years (2021-22 to 2025-26), with an estimated government budgetary support (GBS) of Rs 976.31 billion. The scheme aims to reduce AT&C losses on a pan-India level to 12-15 per cent by 2024-25; reduce the average cost of supply-average revenue realised gap on a pan-India level to zero by 2024-25; and improve the quality, reliability and affordability of power supply to end-consumers. The RDSS focuses on providing financial support for smart metering systems, distribution infrastructure upgrades, training, capacity building, and other enabling and supporting activities.
Within the framework of the RDSS, there is a provision to extend financial support to eligible discoms for the deployment of prepaid smart meters for 250 million consumers, as well as system metering with communication features, by March 2025.
Additionally, a framework for promoting advanced technologies across the power distribution sector has been approved under the RDSS. Under this, a two-pronged strategy has been adopted, involving leveraging the existing network of technology solution providers to test and scale up use cases at discoms, and creating power distribution focused incubators for continuous innovation in the sector. Under the scheme, advanced information and communication technologies such as artificial intelligence and machine learning will be leveraged to analyse data generated through smart meters, to detect theft and take informed decisions on loss reduction. Further, smart meters, along with envisaged information technology-operational technology works, are expected to improve the operational and financial performance of the sector.
According to the Report of the Standing Committee on Energy (March 2023), the utilisation of funds under the scheme during 2022-23 stood at Rs 45.56 billion, against the budgeted outlay of Rs 60 billion. Under the RDSS, detailed project reports worth Rs 1,191.34 billion, including GBS of Rs 758.84 billion, have been sanctioned. Out of the total sanctioned funds, as proposed by state/discoms, Rs 145.09 billion has been sanctioned for works pertaining to high voltage distribution system implementation, cabling and feeder segregation.
Till date, around Rs 820 billion worth of loss reduction works have been awarded across 19 states. Eight discoms have achieved physical progress of over 10 per cent, while three discoms have completed over 20 per cent of sanctioned works.
Challenges and the way forward
While the distribution sector has witnessed significant improvements, challenges such as lack of cost-reflective tariffs, delays/non-payment of subsidy and dues by state governments, lack of monitoring and evaluation frameworks for capex, lack of a regular tariff increase, and issues with consumer service in rural areas continue to persist. However, the ongoing policy emphasis on the distribution segment will continue, with the aim of improving the financial performance of discoms and elevating consumer satisfaction.
Going forward, the outlook for power distribution appears promising, with grid modernisation, automation and the integration of renewable energy expected to remain key focus areas for investments. Structural changes are under way, with a view to electricity gradually becoming the primary choice for automotive fuel, displacing traditional options such as petrol and diesel, with EVs emerging as a significant disruptor. On the supply side, there is a noticeable trend towards mainstreaming renewables in the energy portfolio. Formats such as solar rooftop, decentralised generation, green hydrogen and others are anticipated to experience substantial growth. Despite challenges persisting in the power distribution segment, ongoing technological advancements and a transition towards cleaner energy sources offer a promising future. It is essential for the segment to fortify itself in order to navigate these evolving changes and establish a robust resource adequacy plan.
