Bailing out the ailing DISCOMs

The Union Finance Minister of India has announced ₹. 90,000 Crore under Atmanirbhar Bharat to support DISCOMs (Electricity distribution company). It is welcome step by the union government as many DISCOMs are suffering from cash crunch due to the Covid-19 lockdown. The electricity demand of India has reduced by around 20 percent to 25 percent during the three phases of lockdown. Due to reduction in electricity demand, many of the conventional power plants generation has been drastically reduced, also, there is a reduction in generation from renewable energy sources when compared to last year. Some of the state governments requested for aid to bail out the ailing DISCOMs.

DISCOM Losses
It is not only due to the Covid-19 lockdown the DISCOMs are making losses. Actually, it’s a recurring thing and most of the DISCOMs in the country are making losses all around the year. In Financial year 2019, the total losses of DISCOMs was around ₹ 27,000 Crore. Moreover, as of February 2020 the total outstanding amount owed by DISCOMs to generators is about ₹ 90,000 Crore. The severity index of financial status of DISCOMs is presented in Figure 1. Except few states in North and North eastern region, the financial status of majority of the DISCOMs is very bad. The states with highest overdues are Rajasthan (₹ 27,000 Crore), Uttar Pradesh (₹14,000 Crore) and Tamil Nadu (₹ 13,000 Crore). In the last twelve months, the overdue amount was always around ₹ 90,000 Crore. However, the COVID-19 situation has just blown out the existing crisis as DISCOMs could not retrieve the electricity bills from the consumers.

At this juncture, the government liquidity offer was welcome step to bail out the ailing DISCOMs in the short-term. To balance the DISCOMs books in the right direction, government need long term strategies. Even though the UDAY scheme rolled out by the union government had some positive impact on the DISCOMs, still it did not yield expected results in bailing out the DISCOMs, since, it was expired in March, government came with ATAL Yojna for the DISCOMs bailout. For understanding the effectiveness of this new scheme we need to wait and watch. Further, several tranches announced by the finance minister like privatising the UT DISCOMs, new tariff policy are good schemes. However, until it is implemented it is very difficult to predict the impact of it on the Indian power sector.

Figure Financial status of DISCOMs (Source: PRAAPTI)[/caption]

PRAAPTI – Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators

What lead for DISCOMs losses
Each state has its own problems. Some of the reasons include

•  Installation of renewable energy
  As of April 2020, India has close to 370 GW of installed capacity and its peak demand is only around 180 GW i.e. only less than 50 percent of the installed electricity capacity is under operation most of the times. Rest of the installed capacity are lying idle and with the increase of renewable energy into the electricity system the idle generation capacity is having an increasing trend. Moreover, renewable electricity has must run status and is given preference in generation. The idle generation capacity is actually non-performing assets and it adversely affects the DISCOMs revenues.

• Aggregate Technical & Commercial Losses (AT&C Losses)
  It is combination of energy loss (Technical loss + Theft + inefficiency in billing)& commercial loss (Default in payment + inefficiency in collection). Some of the states have close to 30 percent of AT&C losses. It is one of the main reasons for the poor performance of the DISCOMs.
• Ill-advised subsidies – as populist schemes
  This is one of the main reason for poor financial condition. For example, in Tamil Nadu every household is given free 100 units of electricity. From rich to poor everyone electricity consumer is offered this freebie. This is financially unviable for the revenue of the DISCOM. Government needs to target the poor who are mostly in need of these schemes.

So, for the long-term success of DISCOMs this ₹ 90,000 Crore liquidity may not be sufficient. However, it is a blessing in disguise in the short term for DISCOMs functioning. The privatisation of DISCOMs in Union Territories can be considered as a precursor to the future privatisation of DISCOMs across the country. The days of electricity shortage in the country is long gone. Now the challenge in the electricity sector is to maintain quality, reliability of electricity and making profits. The important point is, electricity is considered as the fourth basic need after food, clothing and shelter. So, it should be considered as a service and not as a commodity. Even though the government declared 100 percent electrification, still certain population is electricity poor. The privatisation of it, should not hinder their prospects. Until, the electricity poor is eradicated the country should serve electricity and should not sell it as a commodity.

Previously the coal availability was one of the major issues plaguing the DISCOMs. However, through UDAY those issues were addressed. However in the present situation in states with considerable renewable energy capacity, coal power plants are not in operation resulting in low PLF. The new scheme for power distribution should address these issues. Moreover, the new tariff policy is expected to aid the DISCOMs. Until these issues are addressed, if DISCOMs makes profit it may be considered as an aberration.

This article is authored by Dr. Balasubramanian S. from Indian Institute of Science.