explained-why-the-govt-had-to-inject-money-into-the-power-sector

Context: The Indian government responded to COVID-19’s economic shock with a stimulus package of ₹20-lakh crore, out of which ₹90,000 crore was earmarked for DisComs (later upgraded to ₹1,25,000 crore). 

Need for liquidity injection 

  • It is due to poor financial condition and revenue collection abilities of most state discoms
  • The upstream side (electricity generation) was drawing investments even as the downstream (distribution) side was leaking like a sieve.
  • Distribution Companies (DisComs) have been called the lynchpin but also the weakest link in the electricity chain. 
  • Growth of renewable energy, or ambitions of smart energy, all depend upon DisComs.

How does the government's move help?

  • The move is aimed at helping the discoms clear their dues with gencos (or electricity generation companies), who in turn can clear their outstanding dues with suppliers, such as coal miners,like Coal India Ltd and contract miners.
  • This is subject to the condition that the Centre will act as guarantor for loans given by the state-owned power finance companies such as Power Finance Corporation (PFC) and REC Ltd to the discoms.

Concerns: The poor financial situation of state discoms has been affecting their ability to buy power for supply, and the ability to invest in improving the distribution infrastructure. Consequently, this impacts the quality of electricity that consumers receive.

  • More loan than stimulus
    • While it was called a stimulus, it is really a loan, meant to be used by DisComs to pay off generators. Stimulus loans are near market terms and not soft loans. 
  • Cross subsidization: In India, electricity price for certain segments such as agriculture and the domestic category (what we use in our homes) is cross-subsidised by the industries (factories) and the commercial sector (shops, malls). This affects the competitiveness of industry. 
    • Most states do not like to increase tariffs for politically sensitive constituents, such as farmers. 
    • While there are regulatory bodies such as the Regulatory Commissions of the state (SERCs), which are largely responsible for ensuring that tariff revisions happen regularly and a discom recovers the money for the electricity that it supplies to each customer, this has not been that successful on the ground. 
  • The AT&C (aggregate transmission and distribution losses):  Domestic electricity consumption contributes 21.4% of  India’s average aggregate technical and commercial (AT&C) losses.Increased domestic consumption in lockdown is resulting in enhanced T&D (transmission and distribution) losses and financial losses.
  • The gap between the cost of electricity bought (average cost of supply) and supplied (average revenue realized) for discoms is still substantial in most states and ranges from ₹2.13 per unit in Andhra Pradesh to ₹0.09 in Chhattisgarh.
  • Debts: 
    • DisComs have delayed their payments upstream.
    • The Power Finance Corporation (PFC)’s Report on Utility Workings for 2018-19 showed dues to generators were ₹2,27,000 crore.
    • The government’s PRAAPTI (or Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators) portal only shows for DisCom dues to generators. It is not comprehensive. 
  • States as defaulters: State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time. 

Types of debts

  • These debts are of three types. 
    • First, regulators themselves have failed to fix cost-reflective tariffs thus creating Regulatory Assets, which are effectively IOUs, which are to be recovered through future tariff hikes. 
    • Second, about a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments.
    • Third, consumers owed DisComs over ₹1.8 lakh crore in FY 2018-19, booked as trade receivables.
  • COVID-19 lockdown disproportionately impacted revenues from so-termed paying customers, commercial and industrial segments. 
  • Reduced demand for electricity did not save as much because a large fraction of DisCom cost structures are locked in through Power Purchase Agreements (PPAs).
  • The rise of renewable energy means that premium customers will leave the system partly first by reducing their daytime usage. 
  • And as battery technologies mature, their dependence on DisComs may wane entirely. 
  • Non Performing assets (NPA) Stress in banking sector: With at least 10 states losing about a third of the power supplied to their consumers in distribution losses, their discoms debts have also contributed to NPA stress in the banking sector. 
  • Lower per capita consumption: India’s per capita power consumption, about 1149 kilowatt-hour (kWh), is among the lowest in the world. In comparison, the world’s per capita consumption is 3600 kWh. 
  • The proposed merger of REC with state-owned shadow banking firm Power Finance Corporation has hit a roadblock and is not likely to happen in near future as it would violate Reserve Bank norms on the exposure of non-banking financial companies (NBFCs).

Way forward:

We will probably need a much larger liquidity infusion than has been announced thus far, but it also must go hand-in-hand with credible plans to pay down growing debt. Generators, transmission companies, and lending institutions must all chip in. 

  • Improving AT&C losses is important, but will not be sufficient. 
  • We need a complete overhaul of the regulation of electricity companies and their deliverables. 
  • Controlling cross subsidization: We need to apply common sense metrics of lifeline electricity supply instead of the political doleout of free electricity even for those who may not deserve such support. 
    • Regulators must allow cost-covering tariffs. 
  • Discoms must therefore, 
    • buy cost-efficient power for consumers, 
    • ensure supply reliability with quality by minimising losses/leakages 
    • accurately meter, bill, and collect payments from the consumers, and
    • thereby, enable timely payments to the generators. 

These are key steps towards sustaining the entire energy value chain without power supply disruptions. There is a need for another scheme to address the shortfall of UDAY’s targets.

About the Indian power sector: It can be broadly segmented into generation, transmission, and distribution sectors.

  • Generation sector: India has an installed power-generation capacity of 368.69GW. The peak load demand of 1,75,528 MW during FY 2018-19 was largely met.
    • Electricity is generated at thermal, hydro or renewable energy power plants, which are operated by either state-owned companies such as NTPC Ltd or private companies (also called Independent power producers or IPPs) such as Tata Power or renewable companies such as ReNew Power or Greenko.
  • The transmission sector: The generated electricity then moves through a complex transmission grid system comprising electricity substations, transformers, and power lines that connect electricity producers and the end-consumers. 
    • India’s regional grids (Northern, Eastern, Western, North-Eastern, and Southern) are currently integrated into one national grid.
    • The transmission segment is dominated largely by state-owned companies such as Powergrid Corp, which operate the grid. 
    • Each state has a State Transmission Utility (STU) along with private transmission companies which are responsible for setting up intra-state transmission projects. 
    • Grid security: Companies like Power System Operation Corporation (POSOCO) along with National, Regional and State Dispatch Centres (NLDC, RLDC, SLDC) work in tandem to ensure grid security and balance.

What is an electricity grid?

The entire electricity grid consists of hundreds of thousands of miles of high-voltage power lines and millions of miles of low-voltage power lines with distribution transformers that connect thousands of power plants to millions of electricity customers all across the country.

 

The distribution sector: It consists of Power Distribution Companies (Discoms) responsible for the supply and distribution of energy to the consumers (industry, commercial, agriculture, domestic etc.). 

  • This sector is the weakest link in terms of financial and operational sustainability. 
  • Discoms essentially purchase power from generation companies through power purchase agreements (PPAs), and then supply it to their consumers (in their area of distribution). 
  • Due to the perennial cash collection shortfall, often due to payment delays from consumers, Discoms are unable to make timely payments for their energy purchases from the generators. This gap/shortfall is met by borrowings (debt), government subsidies, and possibly, through reduced expenditure. 
  • This increases the Discoms’ cost of borrowing (interest), which is inevitably borne by the consumer. 

Govt. initiatives for the power sector: 

  • Financial restructuring/ bailout (Ahluwalia Committee 2001)
  • Central FRP Scheme 2012
  • Operations, infrastructure, and technology improvements (APDRP 2001, R-APDRP/IPDS 2008, DDUGJY & SAUBHAGYA 2014/2017, Smart Grid Pilot project & NSGM 2012-15), and structural reform (Electricity Act 2003). 
  • UDAY (Ujwal Discom Assurance Yojana) scheme, launched in November 2015, is the latest attempt to address the severe financial stress due to accumulation of debt by the Discoms, with a focus on improving the overall efficiency and financial turnaround.