Distribution Companies (DISCOMs) have been a significant strain on the Indian power system. Their poor financial performance has been weighing down the entire sector with their inability to pay power generators on time, manage their losses, and iron out other inefficiencies.

In the past, the Indian government has come up with ways to bail out struggling DISCOMs from their mountains of debt. Programs like the Ujwal DISCOM Assurance Yojana (UDAY) were tailored specifically to provide much needed financial assistance, but to no avail.

In recent months, a global pandemic brought the Indian economy on its knees. The unprecedented slowdown was exacerbated with the already inefficient DISCOMs, making matters worse for power developers. The Government of India once again set aside funds to the tune of ₹900 billion (~$11.94 billion) to help DISCOMs get back on their feet amid the ongoing coronavirus crisis.

The government has initiated a few other measures to assist ailing distribution companies in these trying times. For instance, power generators (including renewables) in the country have been ordered to maintain an uninterrupted supply of power across states even if the distribution companies deposit Letters of Credit for 50% of the cost of power they want to be scheduled. For payments delayed beyond 45 days (from March 24, 2020, and June 30, 2020), the late payment surcharge has now been reduced to 12% per annum from the earlier 18%.

Mercom recently reported that despite all the relief provided considering the ongoing pandemic, many DISCOMs, including those in Uttar Pradesh, Madhya Pradesh, and Andhra Pradesh, refused to pay power generators claiming their inability to collect power dues from the consumers. On the other hand, the DISCOMs’ claim of force majeure (Coronavirus outbreak) for not paying generators was rejected by the Solar Energy Corporation of India (SECI).

Apart from internal inefficiencies within DISCOMs, there are other issues like delays in subsidy reimbursements from the government, billing and revenue collection inefficiencies, inadequate tariff hikes, aging power distribution infrastructure, average technical and commercial (AT&C) losses, and power theft, among others that need to be tackled.

Tariff

Tariff hikes have been few and far between in the power sector. The tariffs charged for certain consumer categories do not match the actual cost of power generation. Unless tariffs are revised and regulated, DISCOMs will continue to run on losses no matter how much financial aid is provided.

“It is imperative that DISCOMs charge customers prices that are reflective of the cost to serve. The proposed reforms of calculating tariffs without taking subsidies into account will help DISCOM regain its financial health to a large extent. We hope that these reforms are expedited to execution,” said Ranjit Gupta, CEO, Azure Power.

Another executive, at an independent power producer (IPP), agreed. He stated that regulatory commissions urgently need to rationalize tariffs in many states as it has not been done so in many years. Unless it is done, DISCOMs will continue to have losses regardless of how much financial stimulus is injected.

As of the end of March 2020, DISCOMs owed Adani Green over ₹12.59 billion (~$166.9 million) in overdue payments, one of the largest dues to renewable energy generators in the country. DISCOMs also owed Tata Power Company Limited (TPCL) over ₹17.75 billion (~$235.4 million) in overdue payments, but the companies did not respond for comment.

“Tariffs have increased for commercial and industrial categories but have not been increased sufficiently for agricultural and domestic consumers. It is primarily driven by political compulsion at the state level as successive governments announce freebies and lack the will to fix the issues,” according to a spokesperson for the Solar Power Developers Association (SPDA).

Subsidy Issues

Delays in receiving the subsidy reimbursements from the government have weighed down distribution companies for a long time. Setting aside the fact that tariffs have so far been calculated based on promised subsidies, which are seldom reimbursed, how subsidies have been reimbursed has also led to new issues. The new financial stimulus package promised to DISCOMs by the central government may not work unless the funds are utilized in the right way.

The executive at a major IPP explained that the current strategy involves using the funds to pay developers on behalf of DISCOMs against a guarantee from state governments. However, the funding will be restricted to the extent of the overall subsidies due by the government to DISCOMs. This only accounts for a small part of the overall outstanding dues of DISCOMs in the state and will not make much of a difference in the long run.

Instead, the government should provide funds based on whatever amount the respective states can guarantee towards the entirety of its DISCOMs’ dues and pass the amount on to generating companies on behalf of distribution licensees, he added.

Lack of technology

The ongoing COVID-19 crisis has further exacerbated internal inefficiencies, like the collection of dues on electricity bills. Social distancing restrictions have left DISCOMs unable to physically collect payments from customers. The lack of investments in technologies has also been exposed during this crisis.

Smart meters have been installed in the country, but not at a rapid pace or scale. Recently, the Energy Efficiency Services Limited (EESL) said its smart meters have helped DISCOMs generate a billing efficiency of 95% during the ongoing nationwide lockdown due to the coronavirus, resulting in a 15-20% average increase in monthly revenue per consumer.

“Focus should be on modernizing our aging distribution infrastructure. There have been many innovations over the past decade, particularly smart and prepaid meters, that allow us to significantly enhance reliability, reduce costs, drastically enhance payment timeliness and detect electricity theft. This investment will more than pay for itself over the long run,” said Gupta.

DISCOMs in India have to deal with the adverse effects of increasing AT&C losses, primarily sparked by power theft and inefficiencies in payment collection, which can be solved by installing smart meters.

“We should make DISCOMs accountable for improvement as well. Limits on AT&C losses for the determination of tariffs is a positive reform that has been proposed and would help ensure the customer is protected,” Gupta noted.

Privatization

The privatization of loss-making government entities has proven to be an effective strategy across sectors all over the world. There is no reason for this not to be applied to Indian DISCOMs as they are one of the most significant factors holding down the power sector.

Mercom has discussed the topic of the privatization of DISCOMs in the past. Newer business models through which DISCOMs can be privatized have to be explored immediately.

Recently, the Ministry of Finance (MoF) proposed to privatize DISCOMs in the union territories of the country. DISCOMs in the regions come under the administration of the central government while the respective state governments govern those in the states.

Privatizing some DISCOMs could provide significant impetus to implantation of lasting reforms, for the better, according to Azure’s Gupta.

Conclusion

While privatizing DISCOMs with the highest losses would be a good long-term move, there are some other efforts the government can take to help utilities function more efficiently.

“Increasing the monitoring of losses, timely increase in tariffs, focus on operational efficiency and motivation programs for DISCOM employees are some good initiatives state governments can take under the existing infrastructure,” according to the SPDA spokesperson.

However, in the long run, the government must consider private sector participation through innovative models. A serious engagement is needed between central and state governments to solve the problem effectively. Private sector players should also be consulted in this regard, explained the SPDA spokesperson.

While the Ministry of Finance has said that the government is working on a new tariff policy that addresses limiting cross-subsidies, penalizing DISCOMs for unnecessary power cuts, preventing them from passing their losses to the consumers, among other issues, it must also focus on formulating a long term plan to address issues across the board.

“DISCOMs have always been the weakest link in the Indian power sector, and the COVID-19 has exposed what is already known. Resilient utilities are a must for the economic security of the country, and it is time for a change if utilities cannot survive two months without a government bailout. Investments in the renewable sector have been stymied because of the counterparty credit risk from DISCOMs. The time is here to look at privatizing high-risk DISCOMs as the status quo is untenable,” said Raj Prabhu, CEO of Mercom Capital Group.