Distribution Improvement: Segment shows some recovery

Segment shows some recovery

The performance of the power distribution segment has improved gradually over the past few years but still much remains to be done. The aggregate financial losses of discoms reduced from Rs 561 billion in 2012-13 to Rs 388 billion in 2015-16 while the aggregate technical and commercial (AT&C) losses have come down to close to 20 per cent from about 26 per cent in 2012-13. However, the financial and operational performance of most discoms is still subpar and recently, the power minister directed the two financing arms of the ministry – the Rural Electrification Corporation (REC) and the Power Finance Corporation – to refrain from granting loans to discoms that are making heavy losses (above 15 per cent).  Accordingly, such discoms will not receive any loans for capital expenditure or other purposes till they draw up a roadmap for reducing their losses over a definite time frame (not more than two years) and adhere to it.

Financial performance

As of March 2016, 35 discoms were running into losses. The highest losses, of around Rs 58 billion, were recorded by the Tamil Nadu Generation and Distribution Company. Other high-loss-making discoms include the three discoms of Rajasthan, the Power Department of Jammu & Kashmir, and the Southern Power Distribution Company of Andhra Pradesh.

Between 2012-13 and 2015-16, discom revenues registered a compound annual growth rate (CAGR) of 10.5 per cent to reach Rs 4,406 billion in 2015-16. However, on a year-on-year basis, the growth showed a mixed trend. While in 2013-14 revenue grew at about 11.5 per cent, in 2014-15, it grew at about 14 per cent. The growth rate slowed down considerably in 2015-16 and stood at 7.9 per cent. In 2015-16, 15 discoms recorded revenues of over Rs 100 billion each with Maharashtra State Electricity Distribution Company Limited recording the highest revenue of Rs 565 billion.

Meanwhile, total expenditure increased from about Rs 4,100 billion in 2012-13 to Rs 5,180 billion in 2015-16, recording a CAGR of about 8 per cent over the four-year period. The increase in expenditure is mainly due to a corresponding increase in power purchase costs which constitute over 70 per cent of the total expenditure of discoms. Power purchase costs increased from Rs 3,000 billion in 2012-13 to Rs 4,030 billion in 2015-16. On a year-on-year basis, the growth in expenditure showed a mixed trend. It increased from 8.6 per cent in 2013-14 to 10.1 per cent in 2014-15 and declined thereafter to stand at 5.3 per cent in 2015-16.

Operational performance

Overall, discoms recorded an improvement in their operational performance. For one, the level of AT&C losses declined significantly, from 26.62 per cent in 2012-13 to 23.4 per cent in 2015-16. For the 26 states and the union territory (UT) of Puducherry that are participating in the Ujwal Discom Assurance Yojana (UDAY), AT&C losses stood at 20.2 per cent in 2016-17. As of April 2018, the AT&C loss figure for UDAY states/UTs stood at 21.5 per cent.

Moreover, there has been a steady decline in the gap between the average cost of supply (ACS) and the average revenue realised (ARR). The ACS-ARR gap (on a subsidy-booked basis) stood at Re 0.63 per unit in 2015-16 as against Re 0.84 per unit in 2012-13. The ACS-ARR gap for the UDAY states was reported to be Re 0.45 per unit in 2016-17 as against Re 0.59 per unit in 2015-16. As of April 2018, the ACS-ARR gap for the UDAY states/UTs stood at Re 0.33 per unit.

Update on government schemes

Much of the discoms’ success has been driven by government schemes such as UDAY, the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and the Integrated Power Development Scheme (IPDS). One of the major initiatives taken in the past year was the launch of the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya) on September 25, 2017 with the aim of electrifying all households across the country by March 2019.

Under the IPDS, which focuses on sub-transmission and distribution network strengthening in urban areas and IT enablement of discoms, projects worth about Rs 285 billion have been approved so far and a government grant of nearly Rs 50 billion has been released. The all-India physical progress in terms of completion of various projects stands at 25 per cent with Andhra Pradesh, Gujarat, Tripura and Uttar Pradesh being the front runners.

Further, under the DDUGJY, which aims at feeder segregation and extending electrification in rural areas, projects over Rs 450 billion have been sanctioned so far. Of the total outlay, nearly 48 per cent is for system strengthening projects and 35 per cent is for feeder segregation projects.

Under Saubhagya, nearly 4.35 million households have been electrified till date (since October 11, 2017 – the scheme’s launch date). The target is to electrify all the remaining unelectrified households (about 3.25 million) by March 2019.

Key recent developments

Over the past year, several key policy guidelines were notified by the central government for the distribution segment. Key among these is the consultation paper on open access notified by the Ministry of Power (MoP) in August 2017. The paper recommends that open access customers schedule power for at least 24 hours whenever they seek open access, in order to aid the discoms in planning their power procurement strategy. Besides, it proposes amendments in the calculation of the cross-subsidy surcharge and standby charges.

In June 2017, the government’s policy think tank, NITI Aayog, released the draft version of the National Energy Policy which aims at achieving 100 per cent electrification by 2022. It further places emphasis on the introduction of the direct benefit transfer mechanism to resolve the issue of cross-subsidy and calls for a partnership between central and state utilities in the distribution business with a view to forge forward integration.

Meanwhile, the power ministry is also awaiting parliamentary approval for amendments to the Electricity Act, 2003 which have been pending for the last several years through the Electricity (Amendment) Bill, 2014. The bill proposes to segregate carriage and content by introducing multiple supply licensees in the content (electricity supply business) and continuing with the carriage (distribution) business as a regulated activity. It has been facing significant opposition from discom employee unions which fear privatisation of distribution. In addition, there are plans to impose penalty on discoms for unscheduled power cuts.

Recently, in March 2018, the government launched the National E-Mobility Programme to provide an impetus to the e-mobility ecosystem. The programme is in line with the country‘s vision of 100 per cent e-mobility by 2030 and will be implemented by Energy Efficiency Services Limited which will aggregate demand by procuring electric vehicles (EVs) in bulk to get economies of scale. The growing focus on EVs will lead to increased requirement of charging infrastructure and power demand. Many discoms such as Tata Power Delhi Distribution Limited and BSES have started setting up charging stations. Recently, the MoP issued a notice stating that companies setting up charging infrastructure for EVs do not require any separate licence for electricity transmission, distribution or trading.

In addition, in April 2018, the MoP launched a pilot initiative to procure power from operational projects lacking power purchase agreements (PPAs). Owing to lack of power procurement bids from discoms, PTC India will sign medium-term PPAs with stranded operational generation capacity totalling 2,600 MW. The bidding documents ae reportedly tilted in favour of discoms that will sign the three-year PPAs with no escalation clause.


While some progress has been made by the distribution segment, key issues remain unresolved. The subsidisation of tariffs for agricultural consumers and delay in the disbursal of the subsidy amount by the state government continues to impact discoms’ financial performance. For instance, in a recent review meeting of the MoP with discom heads, it was highlighted that the subsidy amounts worth Rs 18 billion, Rs 15 billion and Rs 50 billion were pending from the Chhattisgarh, Haryana and Punjab governments respectively.

Further, release of new connections and increase in power supply to rural consumers under the Saubhagya scheme is resulting in higher expenditure for discoms. Also, the inability of rural consumers to pay entirely for electricity is likely to impact discoms’ revenue collection going forward. Though there are plans to install prepaid meters for such consumers, the on-ground implementation of the same will take some time.

Besides, concerns have been raised regarding the data submitted by discoms for the UDAY portal. Certain discrepancies have been observed in the provisional data and the final audited data. The lack of accurate data results in an imprecise analysis of discom gains accrued under the scheme and impacts policymaking in the long run.

Other challenges include pending electricity dues from government departments, delay in implementation of IPDS and DDUGJY projects due to inadequate fund utilisation, rampant power thefts, insufficient tariff revisions, slow progress on smart metering front, and limited private sector participation among others. Going forward, the key to resolving the distribution segment’s issues lies in professional management of discoms without state government interference and granting greater power to regulators in terms of stipulating tariff revisions and loss control measures.