Improving Discom Finances: Key trends and policy reforms in the distribution segment

The distribution segment has continued to be the centrepiece of government refor­ms and schemes in the power sector for many years. In 2021, the central government launched the biggest-ever distribution segment scheme, the Revamped Distribution Sector Sc­heme (RDSS), with an outlay of Rs 3,037.58 billion, with an estimated government budgetary support (GBS) of Rs 976.31 billion, over a period of five years from 2021-22 to 2025-26. The scheme is refo­rm oriented and result based in nature and ai­ms to reduce aggregate technical and commercial (AT&C) losses on a pan-India level to 12-15 per cent and reduce the average cost of supply (ACS) and average revenue realised (ARR) gap to zero by 2024-25. While the operational and financial performance of the segment continues to be an area of concern, there has been some improvement in the past few years.

Size and growth

The distribution network, in terms of line length and transformer capacity, has been growing st­ea­dily. As per India Infrastructure Research, the distribution line length and transformer ca­pacity have grown at a compound annual grow­th rate (CAGR) 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 stood at about 13.9 million ckt. km. Utility-wise, the state-owned discoms of Maha­rashtra and Tamil Nadu have the largest distribution networks.

During 2021-22, the total energy sales to end-consumers in the country stood at 1,136 BUs. Industrial consumers accounted for the highest energy sales with a share of 33 per cent, followed by domestic (30 per cent), agricultural (20 per cent), commercial (9 per cent) consumers, and others (8 per cent). Between 2017-18 and 2021-22, the CAGR for energy sales stood at 3.9 per cent.

Operational and financial performance

As per the 11th rating exercise, the financial deficit of discoms nearly halved in 2021-22 over 2019-20, despite an 8 per cent increa­se in the gross input energy. The national absolute cash-adjusted gap (losses) in the distribution segment dropped substantially to Rs 530 billion in 2021-22, from Rs 970 billion in 2019-20. Meanwhile, the sector’s total liquidity gap is nearly Rs 3.03 trillion.

With regard to outstanding discom dues, as per the PRAAPTI portal accessed on June 12, 2023, the total dues of discoms towards gencos comprised balance legacy dues of Rs 504.43 billion and current dues of Rs 559.29 billion. This is a significant decline compared to the total outstanding dues of Rs 1.38 trillion as of June 3, 2022, when the late payment surcharge (LPS) rules were notified. The LPS rules off­er­­ed a one-time relaxation to discoms wherein the amount outstanding, including the principal and the LPS, was frozen and was to be re­paid by discoms through monthly instalments of 12 to 48 months.

On the operational performance front, AT&C losses improved to 16.5 per cent in 2021-22, almost 5 per cent lower than 2020-21 and 3 per cent lower than 2019-20 levels. This development was driven by improvement in the collection efficiency, which increased from 93.1 per cent in 2019-20 to 97.2 per cent in 2021-22. Meanwhile, billing efficiency remained constant at ~86 per cent during the same period.

Update on RDSS

The reforms-based and results-linked RDSS focuses on providing financial support for smart metering systems, distribution infrastr­ucture upgrades as well as training and capacity building.

In terms of financial outlay, the scheme envi­s­a­ges Rs 1.51 trillion (GBS: Rs 733 billion) for di­s­tribution infrastructure strengthening and mo­dernisation; Rs 1.5 trillion (GBS: Rs 233 billion) for smart metering and related advanced me­­tering infrastructure; and Rs 14.3 billion (GBS: Rs 10.3 billion) for training, capacity buil­ding, and other enabling and supporting activities. So far, around Rs 1.19 trillion has been sa­nctio­n­ed for loss reduction works and Rs 1.35 trillion for smart metering works. Mean­whi­le, with regard to disbursement, Power Finance Cor­po­ration Limited and REC Limited had disbursed an amount of Rs 15,620 million and Rs 17,580.64 million respectively, to discoms, as of December 31, 2022.

With regard to smart metering, the scheme aims to install a total of 250 million smart me­ters during the period 2021-22 to 2025-26. So far, a total of 204.6 million smart prepaid me­ters, 5.4 million smart system meters for distribution transformers (DTs) and 0.2 million feeder meters have been sanctioned. Meanwhile, tenders for smart metering works, covering ne­arly 103 million prepaid smart meters and 3.8 million system meters (DT and feeder) have been issued. As per the National Smart Gr­id Mission portal, as of June 2, 2023, 1.66 million smart consumer meters, 12,427 DT me­ters and 2,552 feeder meters have been ins­talled under the RDSS. Meanwhile, with regard to distribution infrastructure/loss reduction wor­ks, tenders worth Rs 788.27 billion have been issued.

Policy and regulatory updates

  • Electricity (Amendment) Bill, 2022: It proposes significant changes to the flagship Electricity Act, 2003. Significantly, it proposes to en­able co­m­petition in retail power supply th­ro­ugh non-discriminatory open access to mul­tiple distribution licensees in an area and to allow con­su­­me­rs to choose their electricity supplier. Further, it seeks to facilitate the ma­nage­ment of power purchase and cross-subsidy in the case of multiple distribution li­cen­sees in the same area of supply. Addi­tionally, the bill spe­cifies penalties for defa­ult by obligated entities in meeting their renewable purchase obligations.
  • Electricity (Amendment) Rules: Notified by the Ministry of Power (MoP), these rules bring about several changes to the previous Electricity Rules, 2005. Significantly, the new rules permit distribution companies to automatically recover from consumers, on a monthly basis, the expenses arising out of variations in fuel price and power purchase costs. Also, the MoP has mandated the implementation of a uniform renewable energy tariff for a central pool, from which an intermediary company will procure power to be supplied to an entity that will undertake distribution and retail supply to more than one state. In another development, the MoP has issued the draft Electricity (Amendment) Rules, 2023 incorporating provisions for subsidy accounting and payment and the framework for financial sustainability. As per the draft, state commissions will issue quarterly reports for each discom in their jurisdiction, giving findings on demands for subsidies raised by the discom in the quarter, and consumer category-wise per unit subsidy dec­lared by states. Further, the actual payment of subsidy and the gap in subsidy due and paid will also be reported.
  • Electricity (Rights of Consumers) Amend­ment Rules, 2023: Recently notified by the MoP, these rule require smart meters to be read remotely at least once a day and other prepayment meters to be read by an authorised distribution licensee representative at least once every three months. In addition, the time of day tariff will be made effective from a date not later than April 1, 2024 for commercial and industrial consumers with a maximum demand of over 10 kW ; and April 1, 2025 for other consumers.
  • Draft resource adequacy framework for reliable power supply: In September 2022, the Central Electricity Authority (CEA) introduced draft guidelines for implementing a resource adequacy plan for various distribution utilities. The plan will help states in optimal capacity planning and procurement of power, thereby reducing the cost of supply for consumers. Pilot studies are currently being carried out for five states, Madhya Pradesh, Assam, Odisha, Tamil Nadu and Punjab.
  • Draft guidelines for medium- and long-term power demand forecast: In April 2023, the CEA prepared draft guidelines for medium- and long-term power demand forecast. It aims to serve as a guiding document for po­wer utilities to bring uniformity in their dema­nd forecast approach. As per the draft, the forecast should be prepared for the medium term (more than one year and up to five yea­rs) as well as for the long term (more than five years). The forecast should be carried out for at least three scenarios—optimistic, business-as-usual; and reviewed on a yearly basis.

Challenges and the way forward

As per ICRA’s research, tariff orders for 2023-24 have been issued in 22 out of 28 states, as of May 2023. The tariff hikes approved remain modest across most states, despite rising cost of supply. Delays in pass-through of cost variations remain a key challenge. Moreover, the cash gap for discoms has remained high, owing to high AT&C losses and lack of timely and adequate tariff revision.

Further, as per the 11th rating exercise, the total sectoral debt has increased by 24 per cent to Rs 6.2 trillion from 2019-20 to 2021-22. As for distribution losses, 33 utilities did not achieve the targets in 2021-22. The sector’s regulatory assets have remained stagnant from 2019-20 to 2021-22 at Rs 1.6 trillion, highlighting the need for gr­eater state ef­forts through appropriate tariff in­c­rements, capital support and efficiency measures. Five states, Tamil Nadu, Rajasthan, Delhi, Ma­hara­shtra and Kerala, have contributed he­avily to the sector’s regulatory assets. To add­ress this challenge, states are being pushed to formulate liquidation plans and not create new regulatory assets going forward.

In the coming years, electricity flows will be­come increasingly complex with the growth of decentralised generation and proliferation of EV charging infrastructure. In addition, peak demand is expected to continue growing, putting pressure on discoms to provide reliable power. Going forward, effective im­p­lementation of capex initiatives under the RDSS, including smart metering, remain key to improve operating efficiencies; and timely pass-through of cost variations, optimising operations and ma­intenance cost structure and payment security mechanism for recove­ry of dues from government bodies are some of the measures re­quired to improve discom finances.