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

Context: Part of the package announced by the Finance Minister was a Rs 90,000-crore liquidity injection into power distribution companies (or discoms). 

Need for liquidity injection: 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.

Impact of the move

  • 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, easing some of the working capital woes of 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.

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: A scheme for Financial restructuring of State Owned Discoms has been formulated and approved by the Government to enable the turnaround of the State Discoms and ensure their long term viability
  • Operations, infrastructure, and technology improvements (APDRP 2001, 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.

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.

  • 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. 
  • The AT&C (aggregate transmission and distribution losses):  It is a technical term that stands for the gap between the cost of the electricity that a discom gets from the generating company, the bills that it raises and the final realisation from the collection process from end-consumers such as you and me.
    • 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. 
  • Higher AT&C 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: The discoms owe ₹76,150 crore in dues to power generators at the end of December, 2019. The total outstanding dues of Discoms payable to generators/creditors as of February 2019 stood at an alarming level of Rs. 418.81 billion.
  • 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).

Discoms must therefore, (a) buy cost-efficient power for consumers, (b) ensure supply reliability with quality by minimising losses/leakages (c) accurately meter, bill, and collect payments from the consumers, and (d) 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.

AGGREGATE TECHNICAL AND COMMERCIAL LOSSES

  • Energy losses occur in the process of supplying electricity to consumers due to technical and commercial reasons. 
  • The Technical losses are due to energy dissipated in the conductors ,transformers and other equipment used in the process.
    • These technical losses are inherent in a system and can be reduced to a certain level. 
  • On the other hand, Commercial losses occur due to pilferage by hooking, bypassing meters, defective meters, errors in meter reading etc.
    • There is another component of commercial losses, which is due to non-recovery of the billed amount, which is reflected in collection efficiency.  
  • Commercial losses combined with Technical losses, gives Transmission & Distribution (T&D) loss
  • T&D losses together with loss in collection give us Aggregate Technical & Commercial (AT&C) losses.

Power sector finance companies in India

  • REC Limited (formerly Rural Electrification Corporation Limited) is a Navratna company under the administrative control of the Ministry of Power. 
    • It  funds business with market borrowings of various maturities, including bonds and term loans apart from foreign borrowings, on our own.
  • Power Finance Corporation Ltd. is a Schedule-A Navratna CPSE, and is a leading Non-Banking Financial Corporation in the Country.PFC is under the administrative control of the Ministry of Power. PFC was conferred the title of a 'Navratna CPSE' in June,2007, and was classified as an Infrastructure Finance Company by the RBI on 28th July,2010.