State-owned distribution companies (discoms) are in poor financial condition as a result of high overall technical and commercial (AT&C) losses, insufficient tariffs vis–vis the cost of power supply, inadequate or delayed subsidy support from state governments. and delay in receiving payments from state government bodies. With the continuing shortfall in cash flows to the state’s discoms, their overall debt burden is expected to increase. 6 trillion in 2021-22 on account of the liquidity relief scheme as well as loans received through working capital and capital expenditure funds. The total dependence on subsidies from the respective state governments is expected to be high this year at almost all India level 1.48 trillion (estimated to be 19% of the discom’s income), given the heavily subsidized nature of electricity pricing for certain groups of farmers and residential consumers.
Discoms in major states continue to declare losses, leading to delays in payments to power generation companies and affecting the quality of supply to consumers.
Further, the Ministry of Power (MoP) has recently directed the imported coal based power plants to operate at full capacity with fuel cost and use imported coal to the extent of 10% of the requirement by the domestic coal based plants. The sector’s coal import dependence is expected to increase to around 12-13% in 2022-23, from around 4% in 2021-22. As a result, the cost of power supply for DISCOMs is expected to increase by about 4.5%.
A major area of concern affecting discom finances is the significant delay in the tariff fixation process in several states. The tariff-fixing process for discoms for 2022-23 remains sluggish, with tariff petitions for the year being filed by 24 out of 29 states and tariff orders issued by State Electricity Regulatory Commissions (SERCs) in only 18 states. are going. While the median tariff growth of 2.2 per cent seen through issued tariff orders is higher in 2022-23 than in the previous two years, it is insufficient considering the expected increase in power purchase cost (PPC) for discoms. likely to live. In 2022-23 amid increasing dependence on costly imported coal due to crude domestic coal supply situation and high international coal prices.
In its Budget 2021-22, the central government announced the launch of a “reform-based and result-linked” scheme for the distribution sector with an aim to improve the financial health and operational efficiency of discoms by reducing AT&C losses. Subsequently, the Revamped Distribution Area Scheme was notified in July with an overall outlay of 3.03 trillion. This includes budgetary grants/aids of 97,631 crore, spread over a period of five years. The plan seeks to bring down AT&C losses to 12-15% by 2025-26 through up-gradation of smart metering and distribution infrastructure, including segregation of agricultural feeders. Till April 2022, Government of India has approved proposals of 13 states under this scheme with a financial outlay of approx. 1.62 trillion.
Timely implementation of projects under the scheme, including smart metering programme, is critical for improving discom efficiency. A strong political will and the support of the state governments are necessary to make the scheme a success. Overall, it is also important to focus on improving operational efficiency, timely issuance of tariff orders with substantial tariff revisions and timely subsidy payments to ensure financial stability of DISCOMs.
(The author is Senior Vice President and Co-Group Head, Corporate Ratings, ICRA Ltd.)