Here's How India Wants To Help Struggling Discoms After UDAY Failure

Towers carrying power lines stand next to a highway in New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

Here's How India Wants To Help Struggling Discoms After UDAY Failure

The central government has approved a reform-linked scheme to shore up health of the country’s debt-ridden electricity distribution companies, nearly six years after UDAY plan that failed to find a lasting solution.

The results-linked power distribution scheme—with an outlay of Rs 3.03 lakh crore—seeks to provide conditional financial assistance to discoms to improve their supply infrastructure, the government said in a statement last week. Announced in this year’s union budget, solutions would be worked out for each state differently rather than a “one-size-fits-all” approach.

The objectives are to:

  • Reduce aggregate technical and commercial losses to 12-15% by 2024-25.

  • Cut ACS-ARR gap—or the difference between average cost of supply and average realisable revenue—to zero by 2024-25.

  • Modernise discoms.

  • Improve the quality, reliability and affordability of power supply to consumers.

This result-linked financial outlay rightly recognises the need to incentivize and support discoms in improving financial viability and operational efficiency, said Vipul Tuli, chairman of FICCI Power Committee and managing director at Sembcorp Energy India Ltd. The industry, however, is waiting for tariff reforms necessary to make discoms profitable so that they can fund future investments on their own, he said.

The Narendra Modi-led administration is trying to turn around the fortunes of discoms and manage power costs. It proposed a nationwide short-term power trading mechanism where supply from generators quoting the lowest pricing gets sold first, a move that will help plants without long-term buyers.

The Electricity (Amendment) Bill 2021 to allow power consumers choose from multiple service providers, like in the case of telecom services, is likely to be introduced and pushed for passage in the monsoon session of Parliament beginning in July, Power and Renewable Energy Minister RK Singh said at the virtual Bloomberg NEF Summit.

But the previous effort under the 2016 Ujwala Discom Assurance Yojana didn’t meet its objectives. According to ICRA Ltd., discom debt has risen to nearly Rs 6 lakh crore again with annual book losses estimated at around Rs 75,000 crore for 2021-22.

ICRA cited three reasons for the poor health of power discoms.

  • High technical and commercial losses than the regulatory norms

  • Inadequate tariffs compared to the cost of supply

  • Inadequate subsidy support from the respective state governments

The discoms will have to meet key parameters to get support under the scheme. The scheme provides for annual appraisal of discom on AT&C losses, ACS-ARR gaps, infrastructure upgrade performance, consumer services, hours of supply, corporate governance, according to a government statement. Power distributors will have to score a minimum of 60% and also achieve certain goals.

Rural Electrification Corp. and Power Finance Corp. are the implementing agencies for the plan that will run till 2025-26.

Queries emailed to both the firms regarding remained unanswered. Tata Power Co., Adani Power Ltd. and JSW Energy Ltd. didn’t respond to emailed queries. BloombergQuint awaits response from state discoms of Maharashtra and Rajasthan.

Focus Areas

Improving Electricity Supply For Farmers

As many as 10,000 agriculture feeders would be separated at an estimated cost of Rs 20,000 crore, helping farmers get reliable and quality power through dedicated agriculture feeders. This scheme converges with the Pradhan Mantri Kisan Urja Suraksha Evem Utthan Mahabhiyan scheme to solarise all feeders and boost farm income. That would provide cheap or free day-time power for irrigation and additional income for farmers.

Prepaid Smart Meters
The government plans to install prepaid smart meters, helping consumers monitor usage. As many as 25 crore smart meters are expected to be installed by 2025-26—10 crore prepaid smart meters will be prioritised in the first phase by December 2023 in:

All electricity divisions of 500 cities under the Atal Mission for Urban Rejuvenation and Transformation that have AT&C Losses greater than 15%.

  • All union territories.

  • MSMEs and other industrial, commercial consumers.

  • All government offices at block level and above.

  • Other areas with high losses.

ICRA sees potential in the new plan to improve operational efficiency through smart meters and upgrading infrastructure.

Segregation of agriculture feeders and strengthening the systems will help state-owned power distributors curtail technical and commercial losses, said Sabyasachi Majumdar, senior vice president and group head-corporate ratings at ICRA. Every 1% reduction in AT&C loss brings down annual cost by Rs 5,000 crore for discoms, he said.

Rohit Natrajan, associate vice president at Antique Stock Broking, said these reforms would benefit some capital goods firms. “In smart meters, it could be Genus Power, HPL Electric. In segments like solar pumps, it could be Tata Power and Shakti Pumps, to name a few.”

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.