Focus on capex scheme to revive discoms
Premium- Timely implementation of projects under the reforms-based and results-linked scheme for the distribution sector is critical to improve the financial sustainability of discoms
State-owned distribution companies (discoms) continue to be in poor financial shape as a result of high aggregate technical and commercial (AT&C) losses, inadequate tariffs in comparison to the cost of power supply, insufficient or delays in subsidy support from state governments, and delays in receiving payments from the state government bodies. With continuing cash flow gaps for the state discoms, their total debt burden is estimated to have risen to over ₹6 trillion in 2021-22 on account of debt availed through liquidity relief scheme as well as for working capital and capital expenditure funding. Overall reliance on subsidies from the respective state governments is expected to remain high this year at an all-India level of roughly ₹1.48 trillion (estimated to account for 19% of discoms income), given the heavily subsidised nature of electricity pricing for farmers and certain groups of residential consumers.
Discoms in key states continue to declare losses as a result, which causes delayed payments to power generating companies and impacts the quality of supply to consumers.
Further, the recent directive by the ministry of power (MoP) on operating imported coal-based power plants at full capacity with fuel cost pass-through and the use of imported coal to the extent of 10% of requirement by domestic coal-based plants is expected to increase the sector’s coal import dependence to about 12-13% in 2022-23 from about 4% in 2021-22. This in turn is expected to result in an upward pressure on the cost of power supply for the discoms by about 4.5%.
A major area of concern affecting discom finances is the significant delay in the process of tariff determination in many states. The tariff-determination process for discoms for 2022-23 remains sluggish, with tariff petitions for the year being filed by 24 out of 29 states and tariff orders being issued by state electricity regulatory commissions (SERCs) only in 18 states. While the median tariff hike approved at 2.2%, as seen through tariff orders issued, is higher in 2022-23 compared to the past two years, this is likely to remain inadequate considering the expected increase in the power purchase cost (PPC) for discoms in 2022-23 amid the rising dependency on costlier imported coal owing to the tight domestic coal supply position and elevated international coal prices.
In its budget 2021-22, the Union government announced the launch of a “reforms-based and results-linked" scheme for the distribution sector with the objective of improving the financial health and operational efficiency of discoms by reducing the AT&C losses. Subsequently, the Revamped distribution sector scheme was notified in July with an overall outlay of ₹3.03 trillion. This is inclusive of a budgetary grant/support of ₹97,631 crore, spread over a five-year period. Under the scheme, AT&C losses are sought to be brought down to 12-15% by 2025-26, through smart metering and upgradation of the distribution infrastructure, including the segregation of agriculture feeders. As of April 2022, the Government of India has approved proposals of 13 states under this scheme with a financial outlay of about ₹1.62 trillion.
The timely implementation of the projects under the scheme, including the smart metering programme, remains key to improving discom efficiencies. For the scheme to succeed, a strong political will and support from state governments are a must. On the whole, focus on improving operational efficiency, timely issuance of tariff orders with adequate tariff revisions, and timely subsidy payouts are also critical to ensuring the financial sustainability of discoms.
(The author is senior vice president & co-group head, corporate ratings, ICRA Ltd.)