By Girishkumar Kadam, Senior Vice-President and Group Head – Corporate Ratings, ICRA Limited
The state-owned power distribution companies (discoms) in India witnessed a gradual improvement in their financial performance during FY 2023-FY 2025, supported by higher subsidy support from state governments, moderation in power purchase costs (PPCs) and improved operational efficiency. However, structural challenges persist. The financial health of many discoms remains fragile due to high levels of aggregate technical and commercial (AT&C) losses, inadequate tariffs in relation to the cost of power supply and persistent cost recovery gaps.
One of the key indicators of a discom’s operational performance is AT&C losses, which have declined steadily across most states, supported by efficiency enhancement under various capex programmes such as smart metering. At all-India level, the billing and collection efficiency improved in FY 2025, which reduced AT&C losses to 15.04 per cent. Despite the improvement at an all-India level, discoms in states such as Jharkhand, Uttar Pradesh, Madhya Pradesh and Telangana continued to report elevated AT&C levels, close to or exceeding 20 per cent, in FY 2025. While some states, such as Rajasthan, Maharashtra, Madhya Pradesh, Odisha and Bihar, witnessed lower AT&C losses, other discoms in Punjab, Uttar Pradesh and Telangana witnessed an increase due to lower collection efficiency. The Revamped Distribution Sector Scheme (RDSS) remains a key driver for enhancing the operational and financial performance of discoms through infrastructure upgrades, smart metering and performance-linked incentives. While progress in smart metering has accelerated, implementation remains uneven across states. A sustained reduction in AT&C losses across all state discoms over the coming years will be key to improving their financial health.
Discoms’ book losses at the all-India level decreased to Rs 94 billion in FY 2025 from Rs 572 billion in FY 2023, driven by higher revenue billing rates, subsidy payouts and revenue grants from states to fund losses and lower average PPCs in FY 2024 and FY 2025 as compared to FY 2023. The top five states, Uttar Pradesh, Karnataka, Telangana, Madhya Pradesh and Jharkhand, accounted for the majority of the losses in FY 2025. However, subsidy payouts for states continue to increase due to free electricity schemes promised in multiple states and the highly subsidised nature of power tariffs, mainly for agriculture and certain sections of the residential segment. The draft Electricity Bill, 2025 proposes to shift towards cost-reflective tariffs and reduce cross-subsidies, which could lead to higher tariffs for agricultural, retail and other low-paying consumers, and moderation in tariffs for industrial and commercial users. This cross-subsidy reduction can be achieved through a combination of tariff adjustments across various categories and an increase in state subsidies and/or material improvement in operational efficiency.
Along with the gradual decline in AT&C losses, the reduction in the cash gap for discoms was also supported by the moderation in PPCs during FY 2024 and FY 2025. PPCs, which constitute 70-75 per cent of a discom’s cost structure, remain the single largest contributor to discom expenditure. They rose significantly in FY 2023 due to higher dependence on imported coal amid elevated global coal prices as well as elevated tariff levels in the short-term market. Coal prices have already come down from their peak in FY 2023 and have remained range-bound over the past two years, while short-term tariffs have softened. Further, discoms have benefited from the purchase of cheap renewable power as tariffs discovered through bids have been quite competitive in the past. These factors led to some moderation in costs in FY 2024 and FY 2025, wherein the cost of power supply declined by 1-2 per cent annually over the past two years.
As per ICRA’s analysis, the median-approved PPC for 13 major state discoms was Rs 4.90 per unit in FY 2026 compared to Rs 5.70 per unit in FY 2023. However, going forward, ICRA expects PPCs to increase. This is due to high power purchase agreement (PPA) costs for new thermal assets and elevated tariffs under innovative renewable energy schemes tendered over the past couple of years to meet the demand curve of discoms, compared to the cheap renewable PPAs signed earlier. Hence, an increase in PPCs can be a real possibility in the coming years. That said, the Central Electricity Authority proposed a tariff redesign in May 2026 to increase the fixed charge component of electricity tariffs, allowing discoms to recover their infrastructure costs irrespective of demand. In addition, elevated debt levels keep the interest cost burden high in several states.
Despite the improvement in PPCs and operating performance, tariff inadequacy remains a key concern. The power distribution segment has been unable to pass on variations in the cost structure to customers through tariff adjustments, leading to book losses and the build-up of regulatory assets (RAs). It is to be noted that in order to mitigate the impact of changes in the PPC, the PPC variations can be automatically passed on to consumer tariffs, using the notified formula under the fuel power purchase adjustment surcharge framework. However, some of the states are laggards in fully adopting and implementing this framework. Further, delays in filing tariff petitions, the subsequent issuance of such orders by state regulators and inadequate tariff revisions continue to pose challenges. While the issuance of tariff orders has improved in recent years, the median tariff hike approved has declined over the past two years and is insufficient to fully reflect the changes in the cost structure. As of May 2026, tariff orders for FY 2027 have been issued in 18 states, with the remaining states expected to notify their orders over the coming months. Based on the orders issued till May 2026, the median tariff revision for FY 2027 has largely remained flat, reflecting the absence of tariff hikes in several states, along with tariff reductions or only marginal increases in a few states. The Supreme Court order in 2025 noted that tariffs must be cost-reflective to ensure the financial sustainability of distribution entities. It also directed states to liquidate the existing RAs within four years from FY 2025 and avoid creating further RAs. As per tariff orders, RA levels remain elevated, exceeding Rs 2.9 trillion across key discoms in India. To liquidate these, significant tariff hikes will be required over a four-year period. Given that such steep tariff hikes may not be politically acceptable, state government support may be required to liquidate the RA position in these states.
The debt position of discoms continues to be a key concern. The overall debt across most states continued to increase in FY 2025 due to the debt availed of under the government’s liquidity support and late payment surcharge (LPS) schemes, as well as additional debt raised to fund working capital and capex amid continuing losses. Tamil Nadu, Rajasthan, Maharashtra, Andhra Pradesh, Uttar Pradesh and Telangana constitute nearly 67 per cent of discoms’ gross debt at an all-India level. Such high debt becomes a major cause for concern, especially given discoms’ revenue and profitability profile, and requires support from state governments.
The implementation of the LPS Rules in June 2022, which include provisions such as restrictions on access to the short-term power market in case of delayed payments to generators and regulation of access to long-term sources, has led to a material reduction in outstanding dues owed to power generating companies. In several instances, the reduction in outstanding dues was facilitated by liquidity support schemes and refinancing through financial institutions, effectively translating into debt for discoms rather than eliminating their liabilities. Therefore, without sustained improvement in operational performance and tariff adequacy, the risk of dues accumulating again over the medium term still lingers.
The cash gap of state-owned discoms at the all-India level in FY 2024 and FY 2025 improved steadily on account of higher subsidies, Ujwal Discom Assurance Yojana (UDAY) grants/loss funding support and lower PPC. It could reverse in the future if tariff revisions remain inadequate and interest costs and PPC increase. A sustained decline in AT&C losses, meaningful and timely tariff revisions and reduction in overall debt will remain critical parameters for reducing the cash gap on a long-term basis.
A key trend in the distribution segment is the variation in performance across states and private utilities. The credit profile of privately owned distribution utilities remains supported by operational strengths arising from the demographic profile, operational efficiency, tariff adequacy and the presence of a strong sponsor. At the same time, regional disparities remain significant, with eastern and select northern states continuing to lag on efficiency parameters.
As the generation and transmission segments continue to strengthen, the distribution segment remains the critical bottleneck for achieving overall sectoral sustainability. The distribution sector has witnessed multiple reform cycles over the past two decades, including schemes such as UDAY, liquidity support initiatives and the RDSS. While these interventions have successfully stabilised the sector at various points, they have largely focused on financial restructuring and debt realignment rather than meaningful operational improvement. However, the financial improvement of discoms will depend not only on reducing losses but also on optimising power procurement, restructuring debt at lower costs, and implementing timely and cost-reflective tariff mechanisms.
