After a period of sustained recovery/improvement in aggregate technical and commercial (AT&C) losses, the distribution segment has shown some slippage. AT&C losses have increased by two percentage points to 17.6 per cent in FY2024, as per the latest estimates (provisional) from the Ministry of Power. Losses had improved to 15.4 per cent in FY2023 after a good recovery in the previous two years (22.3 per cent in FY2021 and 16.4 per cent in FY2022).
The past year proved challenging for the sector, as discoms pulled out all the the stops to meet an exceptionally high demand. In addition, unpaid government dues amounted to approximately Rs 130 billion in the previous fiscal, representing a significant burden. Coupled with other challenges such as increased power purchase costs, limited tariff hikes and debt, discoms have been under pressure.
The segment did, however, report a decline in operational losses, specifically in the average cost of supply-average realisable revenue (ACS-ARR) gap. The gap reduced from Re 0.45 per kWh in FY2023 to Re 0.21 per kWh in 2023-24 (as per provisional data). While this is still not zero, as targeted by the Revamped Distribution Sector Scheme (RDSS), the scheme, which is in its fifth year, is expected to further narrow this through its massive push to smart metering.
Discom economics
PFC Limited’s Report on Performance of State Utilities 2022-23 showed that operational performance in states like Uttar Pradesh, Jharkhand and Bihar was weak, with AT&C losses higher than 20 per cent in FY2023. AT&C losses vary across states, ranging from as low as 7 per cent in Kerala to as high as 25 per cent in Bihar, 30 per cent in Jharkhand and 52 per cent in Arunachal Pradesh. The RDSS seeks to bring down AT&C losses to 12-15 per cent by 2024-25.
The impact of AT&C losses on the sector is significant. Despite improvements in billing and collection efficiency, accumulated losses for the sector were nearly Rs 6,479 billion as of 2022-23, up by 11 per cent from Rs 5,840.71 billion in 2021-22. The states with the highest accumulated losses are Tamil Nadu (Rs 1,625 billion), Rajasthan (Rs 920 billion) and Uttar Pradesh (Rs 916 billion).
The high liabilities of state-owned discoms remain one of the key risks. Debt in the sector has been steadily increasing over the years, primarily to meet capex requirements, fund financial losses and address working capital shortages. The total outstanding debt of discoms stood at around Rs 6.8 trillion as of March 2023, or around 2.5 per cent of GDP. This debt has risen from around Rs 5.4 trillion in 2020-21. Discoms in four states – Tamil Nadu, Maharashtra, Uttar Pradesh and Rajasthan – accounted for close to 55 per cent of the total debt, with Tamil Nadu alone accounting for 23 per cent.
Regulatory assets and subsidy arrears are other challenges. Major states have accumulated substantial regulatory assets, amounting to approximately Rs 1,600 billion, which have remained stagnant from the previous year.
Proposed reforms
To improve electricity distribution, the government has suggested strategies such as public listing of power entities and separately calculating technical and commercial losses.
At the National Conference of Power Ministers of States and Union Territories (UTs), Union Minister for Power Manohar Lal Khattar urged the states to publicly list their profit-making power sector entities (see box). He noted that states with well-performing gencos or transcos, and even power discoms, should consider listing them on the exchanges. He added that Gujarats and Haryana’s power discoms could be considered for public listing. However, he pointed out that discoms would need to improve their rankings before taking such steps. Another idea discussed by the power minister at the conference was to separate the calculation of technical and commercial losses to tackle loss issues.
Recognising the challenges faced by the sector, in a key development, the Electricity Distribution (Accounts and Additional Disclosure) Rules, 2024, were issued in October 2024 to improve financial clarity and regulatory compliance. These rules mandate comprehensive financial disclosures and detailed reporting of revenue, receivables and subsidies. They also ensure the strict tracking of the ACS-ARR gap and AT&C losses.
Additionally, discom management will be required to provide a compliance statement to verify adherence to these standards. The regulations also introduce structured energy accounting and require distinct disclosure of government subsidies. As a result, only revenue from approved tariff orders will be recorded, thereby preventing speculative income from affecting financial transparency.
Privatisation moves
Privatisation, another key reform, could be back on the cards too. According to news reports, Uttar Pradesh Power Corporation Limited is preparing to privatise electricity distribution in the state, with discussions
already under way with industry players. Odisha’s successful discom privatisation model, wherein Tata Power took over distribution in the state, will be studied as a blueprint. The model being considered for the proposed move is a 50:50 partnership, with privatisation likely to begin with two discoms – Purvanchal Vidyut Vitaran Nigam Limited (Varanasi) and Dakshinanchal Vidyut Vitran Nigam Limited (Agra). Privatisation attempts in Uttar Pradesh have been challenging in the past, and in 2020, it withdrew its privatisation plans following protests.
Meanwhile, in November 2024, after a three-year delay, the Punjab and Haryana High Court gave the green signal to privatise power services in the UT of Chandigarh. To recall, Chandigarh was the first UT to issue a tender inviting bids for the complete privatisation of its distribution operations on November 9, 2020 as part of the government’s Atmanirbhar Bharat initiative. The process to privatise power services in the UT began in 2020, following directions from the centre. The process was expected to be completed by the end of that year, but the UT Powermen Union approached the high court on December 1, 2020 against the move. In May 2021, the centre declared CESC Limited’s wholly owned subsidiary Eminent Electricity Distribution Limited as the highest bidder for the Chandigarh power distribution tender. It had quoted a bid of around Rs 8.71 billion against the reserve price of Rs 1.75 billion. Recently, the high court dismissed the power employees’ petition, thereby paving the way for privatisation of power services in the UT.
Chandigarh will be the second UT to privatise its power services, following Dadra & Nagar Haveli and Daman & Diu, where distribution operations were formally taken over by Torrent Power in April 2022. Progress on privatisation in other UTs has, however, remained slow. In October 2024, the electricity department of the Andaman & Nicobar Islands also initiated the bidding process for the privatisation of electricity. Bid submissions are expected to begin in December 2024, with bids scheduled to open on December 27, 2024. The electricity department is currently the sole power supplier in the UT. The power requirements of the islands are met through the UT’s own generating stations as well as power purchases, as it is not connected to the national grid.
Outlook
Reforms such as the RDSS and the Late Payment Surcharge [LPS] Rules have significantly improved the sector’s outlook. The pace of smart metering has seen significant improvement in th e past two years, supported by the RDSS. In terms of financial discipline as well, there has been considerable progress in lowering the revenue gap and reducing discom dues and payables. The LPS Rules facilitated the liquidation of Rs 480 billion in FY2023, which helped reduce the days payable (to gencos and transcos) from 166 in FY2022 to 126 in FY2023 despite a 24 per cent rise in power purchase expenses.
Net, net, while these reforms have enabled the reduction of past dues, future payments will be contingent on the financial health of discoms. The sector is expected to focus more strongly on clean energy to meet its 500 GW goal by 2030. This implies an addition of 300 GW of renewable
capacity in the next six years, besides the current 200 GW capacity. Discom health and AT&C losses are key metrics that will be closely monitored to address the sector’s systemic challenges.
Reya Ramdev
