Power distribution utilities: Challenges remain

A healthy and viable electricity distribution sector is vital for India’s economic growth and for achieving the Prime Minister’s vision of Viksit Bharat. The sector must ensure cost-effective and reliable supply to consumers, while sustaining liquidity throughout the electricity value chain. The distribution sector has seen tremendous expansion in the past decade with notable achievements in rural electrification and universalisation of access. The average supply has increased from around 12.5 hours in rural areas in 2014-15 to around 21 hours in 2022.However, the financial performance of discoms had been under pressure with high aggregate technical and commercial (AT&C) losses and burgeoning debt burden.Starting FY21, the central government has undertaken several result-driven reforms in order to set the distribution sector on the path to financial health and sustainability. The focus is on bringing intrinsic improvements in the sector – related to reducing AT&C losses, improving the reliability of supply, ensuring timely payment of genco and transco dues, etc. The flagship initiative is the Revamped Distribution Sector Scheme (RDSS), which incorporates a funding outlay of Rs 3 trillion to state discoms against the achievement of targets and loss-reduction trajectory. Along with RDSS reforms, other decisive measures such as Late Payment Surcharge Rules, Prudential Lending Norms by Power Finance Corporation (PFC) and REC etc have been introduced.Noticeable improvementsThese reforms have started having a positive impact, as reflected in the recently released 11th integrated annual ratings of discoms. The sector has recovered from the brunt of Covid-19 and has demonstrated significant improvement in key financial parameters. The gap between expenditure and income on a cash-adjusted basis (ACS-ARR Gap) has reduced from Rs 97,000 crore in FY20 to Rs 53,000 crore in FY22, despite a volume growth of 8 per cent during the same period. AT&C losses, which had increased from 19.5 per cent in FY20 to 21.5 per cent in FY21, have shrunk significantly to 16.5 per cent in FY22. The debt service coverage ratio (DSCR) has also turned positive.This improvement is a result of the combined efforts of all the stakeholders. State governments have improved their due subsidy disbursal to over 100 per cent in FY22, along with clearing arrears. Karnataka, Rajasthan, Madhya Pradesh and Maharashtra have shown significant improvement in subsidy disbursement, and the absolute cash-adjusted gap in these states has collectively improved by around Rs 40,000 crore over FY20-22.Discoms have achieved 96 per cent collection efficiency from consumers, driven by initiatives such as digital billing and collection, use of default tracking software, AI-based meter-reading tools etc. Rajasthan, Telangana and Madhya Pradesh exhibited significant reduction in AT&C losses, driven primarily by improvement in collection efficiency. Gujarat discoms have consistently maintained low payables and receivablesRegulators have also started playing their part by issuing timely tariffs – with 45 tariff orders issued before the March 2022 deadline as compared to 30 in the previous year.However, there is still much ground to cover before we cheer. The sector remains loss-making; AT&C losses for some discoms are in excess of 25 per cent. State governments have to clear subsidy arrears of around Rs 66,000 crore, and overall debt levels in the sector need to be brought down.The way forwardBilling efficiency is still stagnant at around 85 per cent; it should be at least 92 per cent. Under RDSS, the installation of “pre-paid” smart meters would bring the AT&C losses down, improve billing accuracy and create transparency for customers. Pre-payment would help in reducing receivable days, especially from institutional consumers. For instance, various government departments and associated institutions had outstanding dues of around Rs 60,000 crore as of March 31, 2022. The target of installing 250 million smart meters would make it the largest smart meter programme globally. Prepaid smart metering in RDSS is being implemented on a service level agreement (SLA)-based monthly payment mode, which integrates system development and maintenance under a single vendor. There is a strong consumer focus with a user-friendly mobile app providing all functionalities at the touch of a button. Almost all the states have committed to participate in the scheme. Upon the completion of RDSS in FY25, we expect a sectoral billing efficiency of more than 92 per cent and AT&C losses of less than 12 per cent.RDSS also links the eligibility for and quantum of fund disbursals with the achievement of predetermined reform conditionalities and mutually agreed year-wise goals. If not complied with, fund flow will stop on yearly basis. The goals consist of various trajectories of AT&C losses, payables to gencos amd transcos, clearance of subsidy arrears, liquidation of regulatory assets, timely publication of tariff orders etc.Energy audit and accounting has been made mandatory for all discoms. This would enable the discoms to analyse their power supply and billing in detail and identify areas of energy theft, unmetered power supply, sale to subsidised consumers, etc. With the implementation of the smart metering infrastructure, including DT metering, communicable meters on feeders, etc. and mandatory energy accounting, the sector would see a 360-degree automation of energy accounting.Going forward, there is a need to reform tariffs and the tariff-setting mechanism. Some states continue to have high cross-subsidisation, i.e. industrial / commercial consumers heavily subsidise agricultural / residential consumers. This should be limited and disincentivised.Like in other sectors, automatic pass-through of fuel costs has been implemented in the distribution sector – thus allowing discoms to timely recover the changes in input costs, rather than waiting for the next year in the true-up cycle. Many states have come on board. This will de-politicise power tariff. States can give subsidy to needy sections.India’s per capita power consumption is expected to grow multifold in the coming decades, in line with economic development and improved standards of living. The electricity distribution sector will need to be healthy and agile to respond to the challenges and opportunities like the growth of electric mobility, increasing renewables integration and highest level of customer service. The power distribution sector is on the cusp of a turnaround, and the improvement is already visible.The writer is Secretary, Ministry of Power, Government of India

Power distribution utilities: Challenges remain

Going forward, there is a need to reform tariffs and the tariff-setting mechanism

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