‘Power for All’ can trip on DISCOM woes

Concerted steps needed across distribution value chain to prevent a contagion effect on generation and transmission. - Mayur Patil

Revival of the power distribution segment has become a crying need for the government’s avowed goal of providing power to every household to be realised. Indeed, ensuring universal access to power has been a huge struggle for India, one of the fastest-growing economies. While progress on the power generation and transmission front has been steady, the story on the distribution front has been quite the opposite.

And unless comprehensive measures are taken – and soon – more pain could be in the offing for distribution companies (DISCOMs), which have been bleeding for long now.

Many a challenge choking DISCOMs

Inadequate, poor infrastructure – lower network investments, lack of IT enabled network

Obsolete, inefficient distribution infrastructure owned and operated by state distribution companies over the years have led to higher transmission and distribution (T&D) losses, given inadequate investments in renovation and modernisation of electrical equipment across the network. Lack of initiative at the leadership level and shortage of technically qualified staff to handle information technology (IT) systems have also stymied investments in IT by DISCOMs.

Lack of quality and reliable data – manual collection, late reconciliation

Lack of credible data on power consumption, loss levels and electrical equipment deployed across the distribution network has resulted in poor planning of expansion, power procurement, loss-reduction initiatives and tariff revisions. For instance, many DISCOMs entered into long-term power purchase agreements (PPAs) – based on higher demand projections made using available data – only to terminate these PPAs after their projections went haywire, resulting in excess tied-up capacity.

Higher AT&C losses – poor collection efficiency, power theft, unmetered agricultural connections

Erratic power supply, frequent tripping, poor billing and collection efficiencies, power theft and unmetered agricultural connections are the key reasons for higher aggregate technical and commercial losses (AT&C) of DISCOMs. The Ministry of Power launched the Ujjwal DISCOM Assurance Yojana (UDAY) in 2015 to revive debt-ridden, loss-making distribution utilities across India. The scheme requires DISCOMs to meet set targets of operational and financial performance such as regular tariff hikes, reduction of AT&C losses below 15 per cent and achieving zero average cost of supply – average realisable revenue (ACS-ARR) gap. But while states like Gujarat, Andhra Pradesh and Karnataka have trimmed their AT&C losses below the UDAY target, the likes of Uttar Pradesh and Bihar (which have a bigger rural and agricultural consumer base) have AT&C losses above 25 per cent.

Lower utilisation of rural infrastructure – longer network with less load connected

Expansion of the distribution network in rural and far-flung areas at lower voltage levels and in areas with higher agricultural and below poverty line (BPL) consumers has led to under-utilisation of distribution infrastructure as revenue generated from power sale to these low-paying consumers is much lower than the cost incurred by DISCOMs to supply power. Additional connections provided under the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya scheme) to hitherto unconnected rural households are expected to aggravate this situation as a large proportion of these consumers come under the BPL category and may not be able to pay up.

Inadequate tariff hikes, higher cross-subsidisation

Currently, tariff in most states is based on the average cost of supply with subsidisation across consumer categories. This results in higher tariffs for industrial and commercial consumers compared with the cost of supply. On the other hand, highly subsidised lower tariffs are levied on domestic and agricultural consumers for whom cost of supply is much higher and revenue recovery is poor. The populist policy stance of politicians also compels regulators to disallow major tariff hikes. Most DISCOMs have only been able to increase tariffs by 2-3 per cent as against the average UDAY target of 5-7 per cent.

DISCOM recovery powered by UDAY, but sustainability a monitorable

The gap between the average cost of supply and the average revenue realised (ACS-ARR gap) for UDAY states narrowed to Rs 0.17 per kWh in fiscal 2018 from Rs 0.41 per kWh in fiscal 2017, but expanded to Rs 0.22 per kWh at the end of fiscal 2019 (as per provisional numbers reported on UDAY portal).

This indicates a reversal of some of the gains achieved through reduction in power purchase costs, interest burden and AT&C loss over the last three years.

With Rs 2.3 trillion worth bonds being issued (86.3 per cent of target) as of March 2019, debt and interest burden on DISCOMs has reduced, resulting in higher liquidity. Aggregate DISCOM debt had fallen from Rs 2.7 trillion in September 2015 to Rs 1.9 trillion in fiscal 2016 and Rs 1.5 trillion in fiscal 2017.

However, sustaining these gains is a challenge given DISCOMs’ dependence on external debt funding to meet capital expenditure for improving distribution infrastructure and funding operational losses.

Also, DISCOMs which have added substantial new rural connections under the Saubhagya scheme could see their AT&C losses balloon on account of higher T&D losses stemming from expansion of their rural network in far-flung areas. These areas are likely to see a drop-in collection efficiency as most of the connections added belong to economically weaker households where revenue recovery may be a key concern.

Huge investments planned in T&D to cut losses, improve efficiency

In the last five years, the generation segment has accounted for the largest share (41 pe rcent) of ~Rs 9 trillion of investments in the power sector, followed by transmission (34 per cent) and distribution (25 per cent).

In the next five years, however, capacity addition in the generation segment is expected to slow down with generation capacity far outpacing power demand, greater penetration of renewables, lack of long-term PPAs and lower short- term power prices.

By contrast, planned intra-state, inter-state and intra-regional transmission projects, including ~300 GVA of substations and ~1 lakh circuit kms of transmission lines, will promote healthy growth in the transmission segment. Measures to strengthen the distribution network, such as feeder separation, metering, underground cabling, transformer replacements and capacity augmentation projects across states distribution utilities will drive investments.

CRISIL Research believes the power sector will attract investments of Rs 9.5-10 trillion between fiscals 2020 and 2024, with the share of the T&D segments rising to 36% and 31%, respectively, and the generation segment accounting for the rest. Higher investment in T&D is expected to reduce T&D losses across the network, bringing some respite to cash-strapped distribution utilities.

Need of the hour

  • Given the many challenges enumerated here, focus must shift to ensuring a turnaround of the distribution segment and strengthening the power sector value chain.
  • Debt re-structuring under UDAY, targeted improvement in DISCOMs’ performance and infrastructure investments through centrally sponsored schemes such as Deen Dayal Upadhyaya Gram Jyoti Yojana and Integrated Power Development Scheme are welcome steps towards achieving this goal.
  • However, on-ground challenges in terms of timely completion of projects, funding of DISCOMs’ share in capex and regular tariff hikes to recover operation costs are some key concerns that may delay the turnaround of DISCOMs.
  • And unless promptly addressed, the plight of the distribution segment could weigh down the generation and transmission segments as well.

Five steps that can help turn DISCOMs around

Re-designing of distribution business process through intensive digitalisation

Distribution utilities must focus their attention and resources on inside-out digitalisation of business processes by investing heavily in IT and IT-enabled solution technologies to automate routine and repetitive activities.

Real-time monitoring of system operations through the length and breadth of the distribution network with intervention at every single system node is necessary for effective monitoring, collection and reporting of operational and financial data to revive DISCOMs.

For instance, Tata Power Delhi Distribution Ltd has made significant technological advancements through extensive use of smart technologies such as advanced distribution management system, field force automation and mapping of 100 per cent of its distribution network on geographic information system or GIS. This has helped it reduce AT&C losses from 15 per cent in fiscal 2009 to 8 per cent in fiscal 2019.

Regular tariff filings, rationalisation of tariffs and direct subsidy transfer to beneficiaries

Tariff filing and approvals should be done in a time-bound manner. Failure to do this results in revenue under- recovery and creation of regulatory assets, carrying costs of which further increase the cost of power supply.

The tariff determination process needs a total overhaul. The current mechanism of determining category-wise tariffs without in-depth assessment and according due importance to category-wise cost of supply has led to heavy cross-subsidisation, skewed towards industrial and commercial consumers. These consumers are penalised with higher tariffs to subsidise domestic and agricultural consumers. Consequently, high-tension consumers are gradually shifting to open access power, resulting in loss of revenue from high-paying consumers.

A lower-than-required increase in tariffs and delayed disbursal of the subsidy component by states adversely affects the financials of DISCOMs. This must be addressed through a uniform tariff hike across categories solely based on category-wise cost of power supply discovered through rigorous analysis of real-time system data to bring in tariff rationalisation across categories. Consumers in actual need of subsidy must be identified and subsidised through schemes such as direct benefit transfer to ease revenue recovery for DISCOMs.

Boost investments, promote operational efficiencies through private participation

Private participation in power distribution should be encouraged, either through outright licencing or a franchisee model, with relevant provisions for network investments, reduction in AT&C losses, and quality and reliable power supply to all consumers covered under licence areas.

The existing regulatory mechanism under central and state regulatory commissions must monitor these private licensees and franchisees strictly and ensure adherence to regulations to maximise consumers’ interests.

States can also explore the different public private partnership models for distribution of electricity, amalgamating the best of both the sectors to make DISCOMs efficient.

Reduce litigations, tariff disputes and pending legal issues in a time-bound manner

Litigations related to power purchase contracts, tariff determination, taxes and duties, etc, must be addressed on priority so that DISCOMs can focus on their core objective of supplying electricity to consumers at competitive rates and improve their financial and operational performance without depending on the government for bailouts.

Timely reporting and auditing of DISCOMs’ financial performance

DISCOMs should mandatorily report their financial performance on a quarterly basis so that required interventions can be made in a timely manner. Public availability of audited financial data will bring in transparency and increase accountability of DISCOMs towards performance improvement.