State-Owned DISCOMs Continue to Impede Renewables Growth

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After at least two decades of bailouts and reform programs, the state-owned power distribution companies (DISCOMs) continue to be a massive drag on not only the upstream segments (generation and transmission) of the electricity supply chain but also the country’s banking system.

Most state-owned DISCOMs are on the brink of bankruptcy in India as they struggle to recover the cost of electricity supply, which is technically referred to as the gap between Average Cost of Supply (ACS) and Average Revenue Realised (ARR).

On average, India’s DISCOMs face a loss of ₹0.93 (~$0.012)/kWh of input energy, which means most DISCOMs are perennially dependent on loans for day-to-day operations and are unable to modernize systems and bring in new technology. According to the Power Finance Corporation (PFC), DISCOMs had an aggregate debt of ₹5.89 trillion (~$72.24 billion) as of March 2021.

The DISCOMs’ inefficiency has been threatening the viability of many renewable energy projects as most of them delay or withhold payments or renege on power purchase agreements.

“Most of these state-owned DISCOMs delay payments to renewable generators. They are holding payments for over one year of generation, which has a direct impact on the cost of financing the project,” Rahul Tyagi, GM-Business Development at Amp Energy, said.

As per the latest available data, Power System Operation Corporation (POSOCO) debarred 15 DISCOMs in six states and a union territory from buying or selling electricity at power exchanges as a penalty for not clearing their dues to generators.

Tyagi said these DISCOMs often impede renewable generation by consistently forcing developers to back down on generation and delay the grant of open access approvals despite being a statutory requirement.

Privatization the way forward

DISCOMs’ conditions have deteriorated over the years. But India has transformed from a power-deficit nation where load shedding was commonplace to a power-surplus country (though power cuts are still common). The country’s renewable capacity, including large hydro, has grown by nearly 145% to 160 GW in the last five years. However, the growth of the generation sector is tied to the well-being of DISCOMs.

The DISCOM crisis is aptly captured by the 10% increase in the absolute cash-adjusted gap (between liabilities and assets) during the FY19-FY21 period. This rise was almost entirely due to the sector’s widening gap between the average ACS and ARR.

“DISCOM Privatization is going to help; we have seen it in metro cities like – Delhi and Mumbai. The Prime Minister has said that the states need to stop providing free power that is where the bleed is for the DISCOMs; once you depoliticize the DISCOMs, it becomes even more sustainable for them to function. Privatization could be a way. If, however, the States do decide to give free power, it is important that DISCOMs are compensated by the State for this through some sort of a mechanism. That is what the government is trying to fix now, to make DISCOM a self-sustaining entity either through privatization or through the state or central government managing the DISCOM. But at the end of the day, DISCOM should be responsible for their own profit and losses to make them profitable. It is also a way to incentivize DISCOMs to reduce their losses in the transmission and distribution can be reduced,” Amit Jain, Country Manager, Engie, a multinational renewable energy developer, said.

In what strengthens the case for privatization, the latest annual ratings for DISCOMs, an exercise conducted by a Central government agency, found that six of the 12 DISCOMs that received A+ ratings were privately owned. These private DISCOMs are adept at employing technology for data-based loss monitoring at substation and feeder-level, using digital channels for billing and payments, helping them cut AT&C losses and make profits. The top four state DISCOMs with A+ ratings are state-owned entities from Gujarat, while no other state-owned DISCOMs even feature in the top ten.

The overall AT&C loss in India is as high as 24.5%. Many state-owned DISCOMs need to adopt technology in the same way as their privately-owned counterparts to improve billing efficiency by shifting to prepaid or smart meters.

Prepaid metering can help reduce thefts and increase collection, as in the case of Manipur. Mercom had earlier reported about the importance and the need for installing smart meters as a first step towards DISCOM reforms.

“Electricity distribution remains the weakest link in the country’s power supply chain, and based on industry experiences, the only viable option to improve the utilities’ operational efficiency and to obtain full-cost recovery is through private participation,” said Sanjay Banga, President T&D, Tata Power.

Banga said that the most difficult problem of cutting AT&C losses was achieved by the Delhi private DISCOM, bringing them down substantially from the national average of 18-20 %. This has not only saved millions for the exchequer but has also provided financial benefits to needy customers by way of subsidy.

A political hot potato

Privatization has often proved to be a political hot potato in most states. But the inability to even replicate a successful state government model has frustrated the industry experts even more than the failure to privatize.

Speaking to Mercom, a senior official from Kerala State Electricity Board (KSEB) said, “There is a plethora of consumers— industrial, commercial, agricultural and those sections of the society that live below the poverty line. Only a state DISCOM can accommodate all these sections and still work seamlessly on a viable tariff structure.”

The official said that DISCOMs struggle with billing efficiency as people resort to electricity theft which is hard to track and eliminate. “This also affects our billing and collecting efficiency. However, for legally distributed power, our efficiency is almost always one hundred percent.”

On the contrary, Gujarat DISCOMs have grabbed most of the top spots in the latest annual DISCOMs ratings due to their innovative measures to improve financial and operational performance. Best practices include implementing high voltage distribution systems and underground cables, bifurcating feeders based on loading, rerouting feeders, and replacing conductors to reduce technical losses. These measures have also allowed Gujarat to reduce electricity theft.

Despite Gujarat’s example, many state DISCOMs take it for granted that a state-owned entity can only run losses — a cost for serving the less privileged population.

Last December, the Ministry of Power said that 39 out of 55 electricity DISCOMs had submitted draft proposals under the ₹3.03 trillion (~$40.82 billion) reforms-based result-linked power distribution program. The program aimed to improve the operational efficiencies and financial sustainability of DISCOMs by providing financial assistance to modernize and strengthen distribution infrastructure. The program also intends to improve the reliability and quality of supply to end consumers.

With privatization, better capitalized private DISCOMs can accelerate smart meter deployment at scale, leading to higher collection efficiencies and better AT&C losses. However, most DISCOMs are state-owned, and private distribution licensees serve only about 10% of India’s population. For state-owned utilities to succeed and to ensure a separation between utility and state, good corporate governance practices, including independent directors, are imperative.

In the Electricity Amendment Bill, the government proposed several changes in the power distribution system to improve the health of DISCOMs. One of the proposed changes was to allow more than one power distribution company in a region, which is intended to bring much-needed competition among state-owned DISCOMs. However, the Bill has been referred to the parliamentary standing committee, and the process will take some time.

“After following the sector for over a decade, I do not believe that state-owned DISCOMs – in their present form – are the answer to India’s energy future. We are out of options. For the Indian renewable industry to truly realize its potential, it will require DISCOMS that are accountable, and that is through privatization,” said Raj Prabhu, CEO of Mercom Capital Group.