Editorial

The Centre’s discom liquidity package comes with many strings attached

| Updated on June 02, 2020 Published on June 02, 2020

While the package manages to address immediate liquidity problems, a more collaborative approach between the Centre and the States may be needed to resolve persisting structural issues that hobble the power sector

Players in India’s power sector, who were in financial hot waters even prior to Covid, have sunk deeper into the quagmire lately with commercial buyers reducing their offtake during the lockdown. With revenues of State distribution companies (discoms) hit hard, their already large overdues to generation companies have mounted. An India Ratings report suggests that overdues from discoms to generation companies had vaulted from ₹55,300 crore in March last year to over ₹91,700 crore by March 2020. In the circumstances, the announcement of a ₹90,000 crore liquidity lifeline for discoms as a part of the Atmanirbhar Bharat package is welcome both for its intent and timing. This package doesn’t entail any direct outlays from the Centre but envisages Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) tapping market borrowings to raise the required ₹90,000 crore. The package, if implemented in full, can ease liquidity across the power value chain and prevent immediate defaults.

The loan disbursements under this package come with many strings attached. For one, to avail of them, State governments are expected to act as guarantors to PFC and REC, with the loans to be released directly to power producers. Two, before availing of the first tranche, States are expected to clear their subsidy dues to discoms and discoms to REC/PFC, failing which they will pay higher interest. This may prove a sticking point for States currently grappling with Covid-related strain on their fisc. States are also expected to effect reforms such as installing smart meters, digital payments and self-assessment by customers. Three, before availing of the second tranche, States are expected to commit to a roadmap to reduce aggregate technical and commercial (AT&C) losses and address gaps between power tariffs and costs. Public sector power producers are expected to offer rebates on fixed costs for the settlement of their dues, which discoms are expected to pass on to consumers. While many of the conditions do represent much-needed reforms in the power sector, it may be unrealistic to expect State governments to initiate them amid this unprecedented crisis.

Overall, even if this package manages to address immediate liquidity problems, a more collaborative approach between the Centre and the States may be needed to resolve persisting structural issues that hobble the power sector — such as free power to agriculture, cross-subsidisation of agriculture and households by industrial consumers, poor quality of service and inordinately high AT&C losses. True, the Centre has recently proposed some changes through amendments to the Electricity Act by looking to facilitate cross-border trade in power, streamline the selection process for appointing members of electricity commissions, allowing distribution licensees to appoint sub-licensees and appointing a contract enforcement authority. But even these measures merely tinker at the periphery of the structural reforms needed, without tackling the core issues plaguing the sector.

Published on June 02, 2020

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