In the fourth tranche of the economic stimulus package, Finance Minister Nirmala Sitharaman announced several significant power sector reforms.

The latest announcement comes on the heels of the announcement made earlier by the Finance Ministry that said that power distribution companies (DISCOMs) would receive ₹900 billion (~$12.03 billion) to recover from the financial rut caused by the ongoing coronavirus crisis.

The center has now proposed to privatize DISCOMs in the union territories (UTs). DISCOMs in the union territories come under the administration of the central government while the respective state governments govern those in the states. The UTs include Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, and Daman and Diu, Delhi, Jammu and Kashmir, Lakshadweep, Ladakh, and Puducherry.

“It will lead to better services for consumers and improvement in operational and financial efficiency in distribution,” Sitharaman said.

Their financial incompetence has made attracting investments into the sector extremely challenging. Programs like UDAY that were announced to help the ailing DISCOMs also failed to fix the underlying problems.

Addressing the issue of DISCOMs recently, Raj Prabhu, CEO of Mercom Capital Group, had said, “DISCOMS are at the root of much that ails the Indian power sector. Unless privatization of DISCOMS is put on the table, chances of a turnaround in the energy sector are minimal.”

Mercom had earlier analyzed that, “due to the financial incompetence of DISCOMs, attracting investments into the sector has become incredibly challenging. Programs like Ujwal DISCOM Assurance Yojana (UDAY) have been introduced in the past and have failed to fix the underlying problems. Notably, in December 2019, Odisha privatized all the five DISCOMs in the state and handed over the work to Tata Power Company.

The finance minister also said that the government is working on new tariff policy. Among other issues, the policy would address limiting cross-subsidies, penalizing DISCOMs for unnecessary power cuts, and preventing them from passing their losses to the consumers. “DISCOMs will promote industry better by providing open access,” added Sitharaman.

Further, it is was also said that the developers for power generation and transmission projects would be selected through the process of competitive bidding. It will also provide for direct benefit transfer of subsidies and installation of smart prepaid meters. The minister also stressed timely payment to the power generation companies.

“Privatization of UT DISCOMs is a significant first step. The next step would be to lay out a plan to privatize DISCOMs throughout the country. This will give a significant boost to the entire power sector, remove inefficiencies, and bring in much-needed investments into the sector. DISCOMs cannot be bailed out in perpetuity; the country needs financially strong, resilient DISCOMs, especially in times like these. Privatization will eliminate issues such as payment delays, curtailment, power cuts, and lack of market-based electricity pricing and stimulate economic activity,” said Prabhu.

DISCOMs owed renewable energy generators ₹68.37 billion (~$914.5 million) in outstanding payments spread across 307 pending invoices at the end of March 2020, according to data from the Ministry of Power’s payment ratification and analysis portal (PRAAPTI). This included dues of ₹311 million (~$4.2 million) under dispute. Tata Power Company Limited (TPCL) and Adani Green Energy Limited (AGEL) were the two non-conventional power generators that were owed the highest amount at ₹17.42 billion (~$232.9 million) and ₹12.59 billion (₹168.4 million), respectively.

The Ministry of Power has also addressed a lot of these reforms in the proposed amendment to the Electricity Act 2003.