Stricter regulations around financing, severe penalties for non-payment of dues, mandatory energy accounting, and auditing are the driving factors behind the considerable improvement in the otherwise sluggish performance of state distribution companies (DISCOM) over the past year.

The Ministry of Power recently 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.

The AT&C losses of DISCOMs declined significantly to ~17% in the financial year (FY) 2021-22 from 22.32% in FY 2020-21. The gap between ACS and ARR declined 68% to ₹0.22 (~$0.002)/kWh in FY22 from ₹0.69 (~$0.008)/kWh in FY21.

A smaller AT&C losses figure suggests that a DISCOM efficiently supplies electricity with minimal leakages. A lower ACS-ARR gap shows that a DISCOM is recouping most of the operational costs.

The improvement comes after the Ministry of Power recently revised norms of lending agencies like the Power Finance Corporation (PFC) and REC, restricting them from financing loss-making DISCOMs without any action plan to improve within a specific timeframe.

On average, India’s DISCOMs face a loss of ₹0.93 (~$0.011)/kWh of input energy, as reported by Mercom previously, 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.

In the absence of such loans for clearing the dues they owe to generating companies, DISCOMs are left with no option but to improve the collection, reflected in the narrowing ACS-ARR gap.

The government has identified PFC to be one of the nodal agencies to work on the financial conditions of DISCOMs, with dedicated members placed on the boards of these DISCOMs.

At the recent Mercom Renewables Summit 2023, P K Sinha, ED (Projects) at PFC, spoke about the various steps the government has taken under the Revamped Distribution Sector Scheme (RDSS) to make DISCOMs more efficient.

Sinha said, “Under RDSS, grants worth ₹3.3 trillion (~$40.35 billion) are to be disbursed to state DISCOMs for energy efficiency. But the government has now placed a clause for the DISCOMs to reduce their AT&C losses to 12% from 15% if they were to be eligible for these funds. If the efficiency parameters aren’t achieved, the grants are converted into loans, which has made the utilities more vigilant.”

The criterion for grants also mandates DISCOMs to clear all the due subsidies by the end of every financial year and the accounts to be prepaid.

Endorsing Sinha’s view, Hitesh Paliwal, Senior VP & Zonal Head, North Zone Corporate Banking Group at SBI, said, “All the banks under the ministry have been notified to implement these criteria before approving loans for the state DISCOMs, as they approach the banks after state lending institutions turn them away.”

The Ministry of Power has also issued Late Payment Surcharge Rules, which provide that unless the DISCOMs promptly pay for the power drawn from the interstate transmission system, their access to the power exchange will be blocked.

The RDSS program states that funding under the program will be available only if the DISCOM commits to an agreed loss reduction trajectory.

Sinha said, “The DISCOMs have to sign a trajectory agreement promising a definite reduction in AT&C and ARR-ACS gap. This is then monitored and evaluated every quarter by the Ministry in a review meeting that lasts for two days. The minister and senior officers interact with the utility heads to identify challenges and things that can be done to improve their performance.”

With heavy penalties coming into the picture, DISCOMs have improved their payment mechanism over time, thus benefiting the power generators in the process.

Last year, the Ministry of Power made a series of presentations before the 15th Finance Commission. The Commission provided an additional borrowing window to states considering the steps they took to reduce their DISCOMs losses. Union Power Minister R.K. Singh had outlined the steps the government took to help improve the financial health of the DISCOMs in the country.

The Ministry has also 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 inefficiency of DISCOMs threatens the viability of many renewable energy projects due to delayed payments and renegotiations on power purchase agreements.

While the push to privatize state-owned DISCOMs continues to grow, the government is seen implementing various measures to ensure they stay viable long-term.