The Ministry of Power (MoP) has issued detailed guidelines for reform-based result-linked power distribution program over the next five years.

The program aims to improve the quality and the reliability of power supply to consumers through a financially sustainable and operationally efficient distribution sector. The plan is to reduce the aggregate technical and commercial (AT&C) losses across India to 12-15% and eliminate the gap between the average cost of supply and the aggregate revenue requirement by 2024-25.

According to the MoP, the outlay for the program is ₹3.03 trillion (~$40.82 billion), with budgetary support of ₹976.31 billion (~$13.1 billion) from the Government of India.

REC Limited and Power Finance Corporation Limited will be the nodal agencies responsible for implementing the program across the country.

To avail benefits under the program, states and their distribution companies (DISCOMs) must sign a tripartite agreement with the central government.

For the program, an inter-ministerial monitoring committee will be constituted under the chairmanship of the MoP’s Secretary. The monitoring committee will design and approve all operational guidelines, approve all action plans and detailed project reports of states/DISCOMs, and review and monitor the program’s implementation.

Last month, Union Finance Minister Nirmala Sitharaman announced the ‘Economic Relief from Pandemic’ package and declared several sops for DISCOMs, including ₹3.03 trillion (~$40.82 billion) outlay for reform-based result-linked power distribution program.

The program would include the Integrated Power Development Scheme (IPDS), Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), and the Prime Minister’s Development Package (PMDP)- 2015 for Jammu & Kashmir, and the savings of the gross budgetary support of roughly ₹170 billion (~$2.28 billion).

The scope of the program is divided into two parts. Part-A covers financial support for the upgradation of the distribution infrastructure, prepaid smart metering, and system metering. Part-B covers training, capacity building, and other enabling and supporting activities.

Part-A

An eligible DISCOM must prepare an action plan to avail funding under the program. The action plan will cover measures needed to strengthen DISCOM’s system, improve operational efficiency and financial viability, coupled with measures needed to improve the quality and reliability of the power supply to customers.

However, DISCOMs making losses will not have access to the funds unless their action plan carries measures needed to reduce losses, with the state government’s approval. The loss-making DISCOMs must file this action plan with the central government.

The funding for works – other than prepaid smart metering, distribution transformer metering, and feeder metering, including integration of the current metering system – would depend upon the DISCOM meeting the pre-qualification criteria and steps taken to reduce the losses it incurs.

The first of the action plan would include steps taken to reduce the gap between the average cost of supply and the aggregate revenue requirement and the time taken to achieve the same.

The monitoring committee would finalize a result evaluation framework for each DISCOM after incorporating result parameters and trajectories. The framework would have two components – pre-qualifying criteria and result evaluation matrix. DISCOMs need to meet the pre-qualifying criteria before they can be evaluated based on the result evaluation matrix. Performance-based on the result evaluation matrix would determine the funding under the program.

The second part of the action plan will list out loss reduction strategies of the DISCOMs. Works required to reduce AT&C losses would be given priority.

The program has a provision for ₹200 billion (~$2.68 billion) for unsegregated agriculture feeders. After that, these feeders would be solarized under the Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM KUSUM) program.

The program would provide funding through gross budgetary support to install prepaid smart meters under TOTEX (CAPEX and OPEX) to attain loss reduction in electricity distribution.

It would cover all electricity divisions of 500 Atal Mission for Rejuvenation and Urban Transformation cities with AT&C losses of less than 15%; all union territories(UTs); micro, small and medium enterprise and all other commercial and industrial consumers; all government offices at block level; and other areas with high losses.

DISCOMs would undertake prepaid smart metering for the rest of the consumers in a phased manner. However, smart meters would not be installed for agricultural connections. Installation of communicable system meters at feeder and distribution transformer level would be funded under TOTEX mode.

Artificial intelligence, machine learning, and blockchain technology would be leveraged to derive actionable management information systems to help DISCOMs take decisions on loss reduction, demand forecasting, asset management, time of day tariff, renewable energy integration, and other predictive analysis.

Gross budgetary support would also be used at the MoP/nodal agency level to develop software for DISCOMs and power departments.

The program aims to ensure that government departments pay on time for their power consumption and DISCOMs meet their renewable purchase obligation targets. To improve accountability, consumers will receive subsidies in their accounts through direct benefit transfer.

The MoP had proposed amendments to the Electricity Act 2003 in April 2020, covering the plan above to improve the health of DISCOMs, including direct benefit transfer and cost-reflective tariffs, among others.

Funding pattern

DISCOMs, state/UT power departments (excluding the private sector) are eligible for financial assistance under the program.

The program will fund a flat 15% (22.5% in case of special category states) of the cost per meter over the whole project period subject to a maximum of ₹900 (~$12) or ₹1,350 (~$18) in case of special category states per meter.

To deploy prepaid smart meters by December 2023, states and UTs would be incentivized with 7.5% of the cost per consumer meter for the whole project or ₹450 (~$6) per consumer meter, whichever is lower. For special category states, incentives would be 11.25% of the cost per consumer meter or ₹675 (~$9) per consumer meter, whichever is lower.

DISCOMs can claim the amount from the fund for prepaid smart meters after installation, commissioning, and demonstration after at least one prepaid billing period in the area specified by the DISCOM in the detailed project report approved by the monitoring committee.

DISCOMs will get maximum financial assistance of up to 60% for distribution system upgradation work, and DISCOMs, in special category state, will get financial assistance of up to 90% for the same.

To execute the program, all northeastern states, including Sikkim, Himachal Pradesh, Uttarakhand, and UTs of Jammu and Kashmir, Ladakh, Andaman, and the Nicobar Islands, and Lakshadweep, will be included in the list of special category states/UTs.

Release of funds

DISCOMs, which initiated tenders for prepaid smart metering after January 1, 2020, will be eligible for funding if DISCOMs carry out prepaid smart metering works under TOTEX mode after obtaining the monitoring committee’s approval.

To receive funds, DISCOMs need to achieve 60% of marks on the result evaluation framework. The framework will be different for every DISCOMs and may differ for each year of evaluation. The framework will be determined annually based on the cumulative and annual performance of DISCOMs.

After qualifying, DISCOMs will get a 10% advance on detailed project report approval as the first installment. Subsequent installments will be released after the annual evaluation as per the agreed result evaluation framework. The second installment of 20% of gross budgetary support will be released after the first evaluation, the third installment of 30% of gross budgetary support after the second evaluation, and the fourth installment of 40% after the third evaluation.

Power Finance Corporation, REC, and other banks will provide counterpart funding. In addition, DISCOMs can also leverage counterpart funding from bilateral or multilateral funding agencies for which the central government will extend benefits of reduced government guarantee fees.

Part – B

To act as a resource center for smart grid activities in the country, the Smart Grid Knowledge Center at Power Grid Corporation of India, Manesar, will be developed with assistance from the Integrated Power Development Program. The Ministry has earmarked ₹300 million (~$4.03 million) to expand the center’s activities with 100% gross budgetary support. The funds will be used to create applications related to artificial intelligence in the distribution sector.

The UTs will be encouraged to privatize power DISCOMs. For this, MoP will provide consultancy support to union territories as a part of the program.

Earlier this month, the Supreme Court lifted the suspension order imposed by the Bombay High Court on the DISCOM privatization process.

As a part of the program, the Ministry also aims to train professionals to improve their corporate governance practices, technical knowledge in advanced technology intervention areas, and new business processes.

DISCOMs have been the weakest link in the power sector and a hurdle for expanding renewables in the country. The government has been taking steps to improve the health of DISCOMs and announced the Ujwal DISCOM Assurance Yojana (UDAY) program in 2015.  The aim was to bring about the financial turnaround and revival of electricity distribution companies in India by reworking the ₹4.3 trillion (~$64 billion) in debt of DISCOMs.

Mercom had then reported that states participating in the UDAY program took over debt of ₹2.09 trillion (~$32.5 billion) from their DISCOMs which was almost half of the ₹4.3 trillion (~$64 billion) of debt by state DISCOMs. Years later will still see DISCOMs struggling with their finances with piling dues to power generators. As of April 2021, DISCOMs owed ₹113.34 billion (~$1.56 billion) to renewable energy generators (excluding disputed amounts) in overdue payments across 200 pending invoices.