The Department of Expenditure, Ministry of Finance, has earmarked ₹1.43 trillion (~$17.4 billion) as financial incentives in the form of additional borrowing permissions for states undertaking various reforms in the power sector during the financial year (FY) 2023-24.

Based on the recommendations of the Ministry of Power, the Ministry of Finance has granted permission for reforms undertaken in 2021-22 and 2022-23 by 12 state governments. Over the past two financial years, these states have been allowed to raise financial resources amounting to ₹664.13 billion (~$8.1 billion) through additional borrowing permissions.

The Ministry, to date, has taken a significant step towards promoting reforms in the power sector by providing financial incentives to states.

The Union Finance Minister announced the borrowing permission initiative during the Union Budget 2021-22 presentation.

Under the program, states will be granted an additional borrowing space of up to 0.5% of their gross state domestic product (GSDP) annually for four years, from FY 2021-22 to FY 2024-25.

However, the availability of this additional financial window is contingent upon states implementing specific reforms in the power sector.

The primary objectives of providing financial incentives for power sector reforms are to improve operational and economic efficiency and promote a sustained increase in paid electricity consumption.

To be eligible for these incentives, state governments must undertake mandatory reforms and meet stipulated performance benchmarks. The required reforms include:

• Progressive assumption of responsibility for losses of public sector power distribution companies (DISCOMs) by the state government.
• Transparency in the reporting of financial affairs of the power sector, including payment of subsidies and recording of liabilities of governments to DISCOMs and DISCOMs to others.
• Timely rendition of financial and energy accounts and timely audit.
• Compliance with legal and regulatory requirements.

Upon completion of these reforms, a state’s performance is evaluated based on specific criteria to determine its eligibility for the incentive amount. The evaluation criteria include the following:

• Percentage of metered electricity consumption against total energy consumption, including agricultural connections.
• Subsidy payment by direct benefit transfer to consumers.
• Achievement of targets for reduction in aggregate technical & commercial loss.
• Meeting the target of reduction in average cost of supply and average realizable revenue gap.
• Reduction in cross-subsidies.
• Payment of electricity bills by government departments and local bodies.
• Installation of prepaid meters in government offices.
• Use of innovations and innovative technologies.

Bonus marks are also awarded to states for privatizing power distribution companies.

The Ministry will serve as the nodal agency for assessing the performance of states and determining their eligibility for granting additional borrowing permissions.

The initiative has prompted state governments to initiate the reform process, and several states have already submitted details of the reforms undertaken and the achievements attained across various parameters to the Ministry of Power.

In the financial year 2023-24, states will continue to have the opportunity to avail themselves of the additional borrowing facility linked to power sector reforms.

States that could not complete the reform process in 2021-22 and 2022-23 may also benefit from the additional borrowing provision allocated for 2023-24 if they carry out the reforms in the current financial year.

The Ministry of Power (MoP) recently proposed draft provisions in the Electricity (Amendment) Rules, 2023, for subsidy accounting and payment and a framework to ensure the financial sustainability of DISCOMs.

The MoP had published data notifying a considerable decline in Aggregate Technical and Commercial (AT&C) losses and the gap between the Average Cost of Supply (ACS) and Average Realizable Revenue (ARR), the key indicators of DISCOMs’ performance.