The power distribution segment has seen improvements in operational and financial performance in the past one year or so, marked by reductions in AT&C losses and the ACS-ARR gap. These improvements indicate that the slew of policy reforms under way in the distribution segment, centered on ensuring viability and sustainability, is yielding results. Nevertheless, some challenges persist, particularly in ensuring the sustained financial viability of distribution companies. Industry experts share their views on the performance of the distribution segment and suggest measures to further improve discom health…
How do you rate the performance of the power distribution segment in the past one year or so?
Executive Director and Chief
Rating Officer, CareEdge
(CARE Ratings)
Sachin Gupta
The performance of discoms has to be evaluated from two aspects – the operational front and the financial standpoint.
On the former, the clearance of tariff subsidy overdues by the respective state governments, along with increased collection through digital channels, has remarkably enhanced collection efficiency. It is pertinent to note that the level of actual meter readings as well as non-manual meter readings has consistently improved over the 2020-21 to 2022-23 period, which has also supported billing efficiency performance. As a result, aggregate technical and commercial (AT&C) losses have reduced from 20.73 per cent in 2019-20 to 15.4 per cent in 2022-23. The reliability of power has improved, which is evidenced by longer supply hours with reduced interruptions. However, there is still substantial scope for further improvement on the operational front.
The second aspect, that is, the financial performance of the discoms, continues to remain weak. The gradual reduction in creditor levels from the peaks of June 2022 has been largely achieved through increased borrowings instead of operational cash flows or equity infusion, which has resulted in higher financing costs. Limited tariff hikes across the sector could not keep pace with the sharp increase in the average power purchase cost witnessed during the past 18 months. The fuel surcharge adjustment, which is available to most of the discoms, also fell short of fully absorbing the purchase cost spikes for a few quarters, leading to continued deficits. In addition, the dues from various government departments have continued to remain high, leaving the issue unaddressed.
To summarise, while there are green shoots on the operational front, financial losses are persistently high. Thus, the timely roll-out of tariff hikes, prudent management of power purchase costs and the ability to recover dues from government entities will be key focus areas to ensure the sustainable turnaround of discoms.
Chief Operating Officer, Intellismart
Surya Pratap Singh
In the past one to two years, the power distribution sector has made significant progress in terms of reducing AT&C losses and narrowing the average cost of supply and the average realisable revenue (ACS-ARR) gap. According to the Ministry of Power, the AT&C losses of discoms, which previously stood at 25.7 per cent in 2014-15, have reduced to 15.41 per cent in 2022-23. Distribution utilities also saw a remarkable 61 per cent year-on-year decrease in losses in 2021-22, attributed to improvements in the ACS-ARR gap. Furthermore, discoms’ outstanding dues to gencos have decreased by over a third since mid-2022.
These positive outcomes stem from the significant reform and policy measures implemented by the Indian government in recent years, aimed at strengthening the operational and financial positions of discoms. A key initiative is the roll-out of the Revamped Distribution Sector Scheme (RDSS) in 2021, boasting an outlay of Rs 3.3 trillion and a gross budgetary support of Rs 976.31 billion. The scheme aims to reduce discoms’ AT&C losses, minimise the ACS-ARR gap and improve the quality and affordability of power supply.
Key focus areas under the RDSS include the deployment of 250 million smart meters by 2025 as well as capacity augmentation. The scheme is making significant progress in revitalising discoms’ operations and management and promoting greater payment discipline in states and utilities. Going forward, the government and various stakeholders should prioritise the programme and ensure its speedy implementation, along with other necessary reforms, to ensure the overall growth and profitability of the distribution sector. This is crucial to bolster the health of the entire power value chain, particularly as India strives towards the goal of achieving uninterrupted 24×7 power supply.
Another game-changing policy measure introduced last year was the announcement of time-of-day (ToD) tariffs under the Electricity Amendment Rules, 2023. The ToD tariffs are set to be enforced from April 1, 2024, for commercial and industrial consumers, and from April 1, 2025, for other consumer categories.
India’s power distribution segment faces several challenges, and a lot more needs to be done to drive the sector out of the woods. Nonetheless, the ongoing policy reforms and initiatives offer hope for the sector’s future. With the effective implementation of central schemes and policies, we can expect positive outcomes for the distribution segment in the coming years.
What is your outlook for the segment? What more needs to be done to improve the operational and financial performance of the discoms?
Sachin Gupta
The power distribution segment is witnessing a gradual transformation supported by a series of proactive policies. While operational performance is expected to improve in 2023-24 and 2024-25, the leverage and debt coverage metrics are likely to remain stressed, especially for the weaker discoms.
A nationwide uniform policy may not work for every discom. Fundamental reform measures such as the rapid implementation of smart meters, plugging dues with respect to government departments through prepaid meters, rationalisation of overheads, adoption of superior technology for addressing demand and collection management are the need of the hour. Electricity is a concurrent subject in Indian polity, where respective state governments have a pivotal role to play. Fair and unbiased assessment of tariff petitions, taking into account the long-term consequences for all stakeholders involved, should be undertaken.
Given the large capacities being set up to fulfil the ever-rising energy demand, swift and satisfactory resolution of impending regulatory issues at various levels is a prerequisite to bolster investor confidence.” Sachin Gupta
Moreover, given the large capacities being set up to fulfil the ever-rising energy demand, swift and satisfactory resolution of impending regulatory issues at various levels is a prerequisite to bolster investor confidence.
Surya Pratap Singh
I am quite optimistic about the future of the distribution segment, which is currently moving in the right direction. The sector is getting digitalised, marked by the deployment of smart meters, and adoption of internet of things-based solutions and artificial intelligence/machine learning tools, which will help improve grid stability and facilitate the integration of renewable energy sources. The adoption of advanced metering, coupled with digital solutions, will significantly boost productivity within the power sector.
“The RDSS is making significant progress in revitalizing discoms’ operations and management and promoting greater payment discipline in states and utilitilities”. Surya Pratap Singh
As the country’s energy demand continues to rise, modernising the grids will become imperative for the distribution sector. Grid modernisation is essential for integrating distributed energy resource (DER) programmes such as rooftop solar and battery energy storage. DER programmes will offer additional support to discoms in managing supply-demand imbalances, helping to improve their financial position and enhance profitability.
Additionally, as the smart meter deployment gathers pace in the country under the RDSS, the distribution sector will need a robust meter data analysis system to derive actionable insights. It is essential for discoms to fully harness smart metering data to help them identify new revenue streams and provide value-added services to consumers. The government must also establish the appropriate policy framework for meter data analysis, enabling the distribution sector to unlock the multitude of opportunities that data mining offers for revenue generation and operational enhancement.