India’s Discom Stress

Context: Distribution Companies (DISCOMS) have been called the lynchpin but also the weakest link in the electricity chain. 

Issues with the DISCOMS

• Insufficient liquidity injection: The government stimulus package included just Rs 90,000 crore for DISCOMS (later upgraded to Rs 1.25 lakh crore).

• High dues to the generators: The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were Rs 2,27,000 crore. Reasons being:  

• High Inefficiencies: due to Aggregate Technical and Commercial (AT&C) losses which includes theft and lack of collection from consumers. 
• Non-trivial cash flow gap: Even if the DISCOMS performed as targeted, they would face a non-trivial cash flow gap (more than Rs 60,000 crore in FY-18-19).

• Lack of comprehensive data: due to voluntary compilation of dues under Payment Rati?cation And Analysis in Power procurement for bringing Transparency in Invoicing of generators (PRAAPTI) portal.

• Challenge to the revival of DISCOMS: 

• Failure of the regulator in fixing a cost-reflective tariff.

• Dependency of DISCOM on explicit subsidies: by the State governments ; Unpaid subsidies make DISCOMS poorer by over Rs 70,000 crore in the last decade. (on a cumulative basis)

• Impact of COVID: has shattered incoming cash flows and disproportionately impacted revenues from industrial and commercial consumers. 

• Obligation to capital cost payments: Already booked trade receivables to the tune of Rs 1.8 lakh crore, which is locked under Power Purchase Agreements (PPA’s).

• Rise of renewable energy: As battery technologies mature, dependence on DISCOMS may wane entirely. 

Way Forward

• A complete overhaul of the regulation of electricity companies and their deliverables to ensure quality supply along with improving AT&C losses.

• Apply common sense metrics of lifeline electricity supply instead of relying on the political rhetoric of free electricity for all. (Regulators must allow cost-covering tariffs only for those who need support.)

• Larger Liquidity Infusion: especially soft loans and not short-term stimulus-based packages.