The government is planning to privatise the electricity distribution companies (discoms) in Union Territories (UTs).
Overview of the power sector in India:
Power generation, transmission, and distribution are the three main processes involved in the power sector.
- Power generation: India’s installed capacity for power generation recorded a compounded annual growth rate (CAGR) of 8.9%, an increase from 124 GW to 344 GW between 2006 and 2018. India is now the third largest electricity generator in the world. Also, India is at 106th position in terms of per capita consumption in 2017, according to world energy statistics published by the IEA
- Transmission: The generated electricity is then transported over hundreds of kilometres to load centers using transmission lines and transmission towers to supply power to consumers. This stage connects electricity producers and end-consumers. Transmission has taken rapid strides in India, with a CAGR of 7.2% between fiscals 2012 and 2018, raising India’s transmission line capacity to 3.9 lakh ckm (circuit kilometre).
- Distribution: The third stage which involves the distribution of power to all the consumers across the nook and corner of the country is where the DISCOMs come into the picture. DISCOMs in UTs are administered directly by the central government while the respective state governments govern those in the states. Private DISCOMs are also operational in India but are limited to a few cities such as Tata Power Delhi Distribution Ltd and Reliance Energy Ltd in Mumbai.
Other Key Challenges facing the Power Sector are:
• Fuel Security Concerns: Thermal capacity addition is plagued by the growing fuel availability concerns faced by the Industry, while a significant gas based capacity of more than 20,000 MW is idle due to non-availability of gas. Coal supplies by CIL is restricted to around 65% of actual coal requirement by coal based thermal plants, leading to increased dependence on imported coal with the cascading result of high power generation costs.
• Under-procurement of Power by States: Increasing power generation costs due to limited fuel availability, poor financial health of State Discoms, high AT&C losses have contributed in suppressed demand projections by State Discoms.
• Inimical Financing Environment: Over the last 4-5 years, the leading rates have increased significantly from the time of project appraisal resulting in project cost overrun and hence higher end tariffs.
More on news:
- Efforts would also be made to privatise a number of discoms in major states such as Uttar Pradesh, Gujarat, Haryana, Karnataka, Madhya Pradesh, Jharkhand and Assam.
- In states where privatisation doesn’t seem feasible, commissioning of independent directors is being proposed to improve the corporate governance of discoms.
Need for privatisation in discoms:
The distribution sector in India continues to be the weakest link in India’s electricity value chain due to multiple reasons such as-
- Indebtedness: According to the Ministry of Power’s (MoP) payment ratification and analysis portal (PRAAPTI) power producers' total outstanding dues owed by distribution firms rose over 47 per cent year-on-year to Rs 1.33 lakh crore in June 2020.
- Financial incompetency: There have been multiple reports of DISCOMs delaying payments owed to solar and wind energy developers in Andhra Pradesh, Tamil Nadu, Madhya Pradesh, and Telangana. This has made attracting investments into the sector extremely challenging.
- Operational inefficiencies due to huge technical and commercial losses (AT&C), which are primarily caused by power theft, poor payment collection procedures, and inadequate tariff hikes.
o India’s average aggregate technical and commercial loss is at 21.4% leading to overdue bills affecting not only power producers but also contributing to twin balance sheet crisis in the banking sector
o Banking sector faces the possibility of an estimated ₹175,000 crore worth of non-performing assets
due to the power sector.
- Increasing open access transactions: A steep fall in prices of power generated by solar and wind energy projects are driving their most resourceful commercial and industrial (C&I) customers to engage in private power purchase through open access.
- Lack of political will and transparency in dealing with phasing out of energy subsidies.
- Decline in demand during lockdown: Agricultural consumers and domestic consumers pay a lower tariff which is compensated by a higher tariff for commercial & industrial establishments. As a result of lockdown, operations of commercial establishments and industries came to a grinding halt, affecting the revenue for DISCOMs.
- Lack of progress in earlier initiatives: The government, under various regimes, has tried to improve the condition of DISCOMs in India through relief packages. For eg- under UDAY programme, state governments took over 75% of DISCOMS’ debt, issuing low-interest bonds to service the rest of the debt. DISCOMs were further supposed to reduce instances of operational and financial mismanagement. Although there were some initial signs of progress under UDAY, the program has not been able to help minimize DISCOM losses.
Benefits of privatising discoms:
- Examples from other states: There are sufficient case studies when private players have been proved to run cash strapped Discoms successfully via more efficiency, increased revenue and improved consumer services. For eg.- The aggregate technical & commercial (AT&C) losses in Delhi after the privatization in 2002 has been brought down from a high of 53% to around 8%.
- Operational autonomy through improved network efficiency and lack of political interference.
- Operational efficiencies: Privatization will eliminate issues such as payment delays, curtailment, power cuts, and lack of market-based electricity pricing and stimulate economic activity.
- Better services for consumers: Smart prepaid meters will allow transparency for consumers and also help DISCOMs reduce AT&C losses and ensures billing accuracy which leaves no scope for human errors.
- Generating private sector appetite amongst Indian and international investors, various PPP models will be tested and it will also provide confidence to larger states and utilities to undertake privatisation based on improvements achieved.
- Need replication in states: Power being a concurrent subject in our federal set up, the Centre may set policy direction, but it is the states that will have to implement, including the decision to privatise. The UTs are a good place to start, though it should be propagated further into the state owned discoms.
o At the same time, analysts note that the privatisation model will offer little for large states by way of learning, primarily because the ability of private actors to manage the diverse consumer base in large states is not proven.
- More autonomy to regulatory bodies: Privatization of DISCOMs will not work until the systemic challenges are addressed. For eg. State Electricity Regulatory Commissions (SERCs) do not formulate tariff orders on time and defer tariff hikes, which adds to the inability of DISCOMs to generate profit.
- Reinventing revenue model: Decentralized renewable power generation through rooftop solar and direct sourcing from corporate PPAs has increased in the total energy mix. It is of prime importance for the DISCOMs to reinvent their revenue model that is conducive to the growth of rooftop solar and open access power. This will also enable the next set of reforms for the sector towards the disintegration of content and carriage.
Other initiatives by the government to improve the condition of discoms:
Bailout package of ₹90,000 crore as part of a ₹20 trillion stimulus package to revive the economy. These funds were to be given to discoms against state government guarantees and accompanied by a temporary tariff reduction.
Proposed distribution reforms scheme—tentatively named Atal Distribution System Improvement Yojana (Aditya)—to cut electricity losses below 12%. The scheme aims to ensure continuous supply of power, adopting models such as privatizing state-run discoms and promoting competition.
Power sector reforms, including implementing the direct benefit transfer (DBT) scheme in the electricity sector for better targeting of subsidies and instilling financial discipline at discoms.
According to draft amendments to the Electricity Act, 2003, the government has pitched for a cost reflective tariff and setting up an Electricity Contract Enforcement Authority to enforce power purchase agreements (PPAs).
One-time relaxation in working capital borrowing limits imposed under Ujwal Discom Assurance Yojana (UDAY). Discoms will be allowed working capital borrowings from banks and financial institutions that may be up to 25% of last year’s revenues to clear dues to power generation and transmission firms.
New tariff policy focusing on improving consumer rights, promoting industry and ensuring the sustainability of the sector to be released soon.