Discom economics behind the dismal summer ahead

Spare a thought for several towns and cities where people may not be able to switch on their air conditioners all the time. Bhuj, Morbi and Anjar, along with other towns in Gujarat, for instance, are already encountering long hours of power cuts. The reason: state run power distribution companies, or discoms, have cut off the power supply since municipalities are yet to pay their dues.

This is unusual if not unprecedented in a country where supply or the cost of electricity is a political hot potato that can make or break electoral fortunes.

“Cutting supply is always the last option. We have given many reminders and enough time for the municipalities to pay up," said an official with one of the discom companies who didn’t want to be identified. Gujarat has four state-owned discom companies.

This may seem like an obvious thing to do in a business transaction but when it comes to the power sector in India, it is anything but that. Exercising this last option is the result of a domino effect— from a policy change effected more than six months ago.

Before one can switch on the air conditioner, the television, or the geyser, the electricity passes through a web of wires across many entities. Electricity is generated at a power plant run by a power generation company, or genco, such as NTPC Ltd, where the primary fuel could be coal, water, wind, solar or nuclear. The job of transporting this electricity to our homes falls on the Power Grid Corporation of India Ltd (to facilitate inter-state movement of power) and the discoms. They lay a mesh of high-tension overhead wires— the ones you see on large farms, trans- formers and substations.

Some of the electricity gets lost in transit, which is referred to as transmission loss, and is borne by the discom. But then, that is just one hit such companies take. Non-payment of dues by the municipalities, like in the case of Gujarat, is another woe. Perennially debt-ridden and loss making, many discoms can’t make their payments to the gencos.

The policy change we are talking about wants to break this cycle.

The central government, in June 2022, issued the late payment surcharge (LPS) rules. For the first time, gencos could cut the supply to defaulting discoms—if they failed to pay within two-and-a-half months from the date bills are raised.

This was not a hollow threat. In August, last year, 27 discoms across 13 states were barred from buying or selling electricity in power exchanges due to non-payment of dues to gencos. The 13 defaulting states were Madhya Pradesh, Telangana, Rajasthan, Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu, Jharkhand, Bihar, Chhattisgarh, Jammu and Kashmir, Manipur and Mizoram.

What followed was a mad scramble to pay up. Soon enough, Andhra Pradesh, Maharashtra, Jharkhand, Bihar, Manipur and Chhattisgarh saw their names struck off after they cleared their pending dues. Others followed suit.

The message had been sent; the head- master won’t budge any longer. The total outstanding dues owed by discoms to gencos is down 46% between June 2022 and February 2023 to ₹71,755 crore.

“They haven’t completely sobered up. But it has brought some financial discipline to discoms and the payment owed to gencos in the last few months has come down. It is a positive development," said Vibhuti Garg, director, South Asia, Institute for Energy Economics and Financial Analysis (IEEFA).

“The ability of the government to implement and provide a strong warning via this mechanism will raise alarms in the minds of discoms. How much they will be able to sustain while reeling under heavy debt will have to be monitored," said Hetal Gandhi, director- research, Crisil Market Intelligence and Analytics.

However, such green shoots had sprouted before. In the last two decades, governments tried at least five bailout packages—three in the last decade alone— hoping for a turnaround. And each time, the discoms have flattered to deceive as dues shot up after the first few years.

Will it be any different this time?

The carrot

The LPS is the latest in the government’s two-pronged carrot and stick policy.

The carrot came in fiscal 2021 with a ₹1.35 trillion bailout package for discoms. A bigger carrot was the ₹3.04 trillion revamped distribution sector scheme in July 2021, which aims to reduce the aggregate technical and commercial (AT&C) losses—representative of power theft, inefficiencies in billing and collection—to pan-India levels of 12-15% from over 22% in fiscal 2021.

Right now, the cost of power for a discom is higher than the price at which it sells to the consumer. The scheme, therefore, also aims to close this gap to zero by 2024-25.

Other steps were also taken. In September 2021, the ministry of power tightened lending norms. To avail funding, loss making discoms now need to draw up an action plan for reducing losses within a specific timeframe and get their state government’s commitment. Then, in October 2021, mandatory energy accounting and auditing was introduced for all discoms.

The government, meanwhile, has approved project reports from 13 states, aggregating to ₹1.62 trillion as part of the scheme. More than half of this amount will be given as grants for installation of smart meters to improve billing and collecting efficiency—smart meters can ensure better recording of power flows.

“Smart meters will bring incremental benefits but it does not really address the main problem in the sector. I do not wish to downplay it but you can only achieve so much with improving billing and collection efficiencies," said Garg of IEEFA.

The Elephant in the...

The elephant in the room, which none of the bailout packages have addressed so far, is the inability of discoms to raise tariffs for consumers.

Unlike other commodities or services, the household electricity bill isn’t revised annually. In most states, tariffs are not revised for years on end and any attempt at an increase is met with widespread protests. The Uttar Pradesh government, for instance, recently announced a proposal to hike tariffs by 18-23% for 2023-24—the first hike in four years. Industries in Noida and Ghaziabad were immediately up in arms.

With electoral dividends in mind, state governments, often, reverse the course. “Discoms are handicapped as state governments do not allow them to raise tariffs. That is where the rot begins," said Vikram V, vice president and sector head, corporate ratings, ICRA Ltd, a rating agency.

“While the cost of power keeps fluctuating, it is not adequately passed on to the consumer. Their own inefficiencies in billing and collection, and the inability to check theft makes it worse."

States also want discoms to keep the tariff for residential and agricultural consumers very low, promising to subsidize their losses. However, the subsidies are typically not released on time. This adds to the interest burden.

“In some cases, subsidies are delayed by months and it balloons. Mind you, we are not operationally profitable either. So, it is an addition to our loss and not a reduction in profit, which we could still live with," said the managing director of a discom on condition of anonymity.

As of 31 March 2022, state governments owed discoms ₹1.39 trillion, data sourced from the ministry of power shows. Of this, ₹76,337 crore are in unpaid subsidies.

The end result? An adverse impact on everyone, from power producers to consumers. While gencos do not get their dues on time, which leads to financial stress, consumers do not get the uninterrupted power supply they deserve.

“On the one hand, you have the user consuming only 1,200 units a year when he should be consuming twice that amount. And you have the gencos, with 500 GW (gigawatt) of installed capacity, supplying only a peak of 220-250 GW," said Pratik Agarwal, managing director, Sterlite Power Transmission Ltd, a power transmission solutions company. “So, you have an eager consumer wanting more and an eager generator wanting to supply more but a broken discom in the middle which is not able to facilitate this."

Milking the rich

There is also the issue of cross subsidies where states milk their industrial consumers—the factories and commercial establishments—to offset the losses they incur on subsidies to sections such as farms. It has reached a point where it has become untenable, experts said.

“It is affecting our competitiveness on a global scale," said Agarwal of Sterlite Power. “This needs correction or our manufacturing sector will begin to flounder. How do you compete with China at such high cost?"

It also does a disservice to the profiling of discoms—something that shows up in the audits. Discoms that are rated as good performers based on financial and technical efficiency parameters have more commercial and industrial consumers than agricultural and household consumers. Gujarat discoms that are resorting to load shedding today, are rated A+ by rating agencies, indicating very high operational and performance capability.

The ratings, however, do not capture differences in demand profile. Domestic load is less than 15% in Gujarat. Industrial load—that carries the highest tariff—is nearly 60% in Gujarat and just 15% in Bihar whose discoms are rated C+, just a notch above C. A rating of C indicates very low operational and performance capability.

Hope springs in the East

After a three-year process, the government of Odisha became the first state in the country to privatize all four discoms in the state in 2020. The move is being keenly watched as a stress test for privatization, touted as the only solution to the financial distress in the sector. The signs are encouraging. All the four have shown a marked improvement in financial performance.

In the past, privatization has successfully worked in urban centres like Delhi, Mumbai, Ahmedabad and Kolkata but there was always a question mark on whether it would work in a large state with significant rural population whose ability to pay for power is significantly lower. What worked? Bidders in Odisha were given a 10-year tariff trajectory and ATC loss was clearly specified. The private discom who won the bid, Tata Power, know the targets.

There are success stories from abroad. Brazil, a country with a federal structure similar to India, is cited as an example. Electricity in the country is a concurrent subject. Their discoms went broke every few years but, in the 90s, privatization kicked in.

“All the Brazilian discoms are solvent and profit making, delivering high quality electricity," said Agarwal of Sterlite Power. “You can either bite the bullet and prevent these companies from dying by changing their ownership or open the market for more competition."

Yet, privatization will be no silver bullet if state governments are not obliging on tariff revisions. In Delhi, for example, discoms claim that successive state governments haven’t cleared their dues, for well over a decade. The cumulative dues, according to the discoms, total ₹25,000 crore.

“It is a concern as it spoils our balance sheet and shakes our confidence for investments in the future," said the chief executive of a power distribution company who didn’t want to be identified.

“Call it freebie or revdi, it is not sweet for us," rued a discom official from UP, talking about political parties making free electricity an election agenda. “It is a dangerous trend and will push us deeper in the red. Even private discoms won’t be able to manage this."