On 30th June 2021, the Union Cabinet – Government of India has approved a Reforms-based and Results-linked, Revamped Distribution Sector Scheme with an overall outlay of Rs3.03 lac crore, inclusive of budgetary grant / support of Rs97,631cr over the period of next 5 years till FY 2025-26.
The scheme envisages turning around the finances of state-owned distribution utilties (discoms) by a reduction in AT&C losses through operational improvements. However, timely implementation by state governments and discoms will remain critical.
Commenting on this, Mr. Sabyasachi Majumdar, Senior Vice President & Group Head- Corporate ratings, ICRA, said, “ The scheme seeks to improve the operational efficiencies through smart metering & upgradation of distribution infrastructure, including the segregation of agriculture feeders & system strengthening, in order to enable state-owned distribution utilities to curtail the Aggregate technical and commercial losses (AT&C). The scheme targets AT&C losses at 12-15% by FY 205-26 as against current levels of 21-22%. Every 1% reduction in AT&C loss level will result in a cost reduction/savings of Rs.50 billion every year for discoms, based on our estimates.
The credit profile of the state-owned discoms remains stressed mainly on account of higher level of technical & commercial (AT&C) losses compared to regulatory norms, inadequate tariffs in relation to their cost of supply and inadequate subsidy support from the respective state governments. As a result, discoms’ debt levels have again gone up post the implementation of earlier UDAY scheme by Government of India notified in FY2016 and are now estimated at close to Rs6 lac crore in FY2022. The annual book losses for state owned discoms in FY 2021-22 are estimated at about Rs75,000cr.
Further, overall subsidy dependence for state owned discoms in FY 2021-22 is estimated at about Rs1.3 lac crore, given the highly subsidised nature of power tariffs mainly towards agriculture and certain sections of residential consumers.
Commenting further, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head- Corporate ratings, ICRA, said, “Further, the use of distributed solar power projects for supply to agriculture consumers through agriculture feeder route is estimated to entail significant savings (estimated at Rs. 140 crore per billion unit of agriculture load met through solar) to discoms through reduction in power purchase cost and lower distribution losses, given the highly subsidised nature of power tariffs to agriculture consumers. This apart, timely tariff determination process including true-up and implementation of fuel & power purchase cost adjustment framework remains critical for the discoms to ensure cost reflective tariffs. The significant delay seen in tariff determination process for utilities in key states also remains an area of concern.”
In terms of tariff order issuance progress for FY 2022, SERCs in 14 out of the 28 states have issued tariff orders for FY2022 as of June 2021, reflecting a slow progress in the issuance of tariff orders. More importantly, tariff orders have not been issued for the past two years in the states of Rajasthan, Tamil Nadu, Telangana, Kerala and West Bengal.
Apart from the delays attributable to the discoms in filing the petitions, the imposition of the lockdown to control the Covid-19 pandemic also led to a delay in the tariff determination process and in turn the issuance of the tariff orders for FY2021 and FY2022.
ICRA has a negative outlook on the power distribution segment. Nonetheless, the credit profile of several privately-owned discoms remains healthy supported by superior operating efficiencies, favourable demographic profile and timely pass-through of cost variations to consumers.
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