Context: State-owned distribution utilities (discoms) continue to be in fragile financial health. In its budget 2021-22, the Union government had 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.
- The meaning of DISCOM is “Distribution Company (In India)”.
- These companies are not generating electricity themselves, rather purchasing it from someone else and just supplying it to the final consumers.
Challenges for discoms
Their precarious financial position is due to the high level of aggregate technical and commercial (AT&C) losses, the levy of inadequate tariffs when compared to the cost of power supply, and insufficient subsidy support from state governments.
- Their overall debt burden, despite the implementation of the UDAY scheme, is estimated to increase to around Rs 6 lakh crore in the ongoing financial year.
- Their annual cash losses are estimated to be about Rs 45,000-50,000 crore (excluding UDAY grants and regulatory income).
- The highly subsidised nature of power tariffs towards agriculture and certain sections of residential consumers: The overall subsidy dependence is likely to be roughly Rs 1.30 lakh crore this year at the all-India level.
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.
Govt. initiative: “Reforms-based and results-linked” scheme
- Objectives: Under the scheme, AT&C losses are aimed to be brought down to 12-15 per cent by 2025-26, from 21-22 percent currently.
- Operational efficiencies of discoms are to be improved through smart metering and upgradation of the distribution infrastructure, including the segregation of agriculture feeders and strengthening the system.
- Components: The scheme has two parts: Part A pertains to the upgradation of the distribution infrastructure and metering related works, while Part B is for training and capacity building, besides other enabling and support activities.
- Upon fulfilment of the pre-qualifying criteria and achievement of the basic minimum benchmarks, evaluated on the basis of proposed action plans by the discoms, they will be given financial assistance.
- Features: Discoms and their state governments will have to sign a tripartite agreement with the central government in order to avail benefits under the scheme.
- The action plan to be submitted by the discoms will be divided into two parts.
- The first part will contain an analysis of the reasons/root cause for losses, the steps proposed for reducing losses, the gap between costs and revenues, and the time required for implementing the changes.
- The second part of the action plan will comprise listing out the work plan for loss reduction and further strengthening of the distribution systems.
- An inter-ministerial monitoring committee will finalise the “Results Evaluation Framework” based on the agreed-upon action plan, incorporating the result parameters.
- For this, the base year has been set at 2019-20.
- The path to be taken by the parameters that are to be monitored — AT&C losses, the ACS-ARR (average cost and revenue) gap, infrastructure upgradation, consumer service, hours of supply, and corporate governance —
- It will be set up for the five-year period ending in 2025-26.
- Only those discoms that meet all the pre-qualifying criteria will be eligible for the release of funds.
- The state/discom will be able to access funds for addressing infrastructure constraints in the distribution system. Priority will be given to work necessary for AT&C loss reduction.
- The use of solar power projects to supply electricity to farmers through the agriculture feeder route is likely to result in savings.
- This is because of a combination of high tariff competitiveness offered by solar power, lower technical losses due to proximity to load centres, and the ability to meet demand during the day when sunlight is available.
Concerns with the scheme
- A loss-making discom will not be eligible unless it draws up plans to reduce its losses, approved by the state government and filed with the central government.
- A continuing area of concern affecting discom finances is the significant delay in the process of tariff determination in many states.
- As of now, only 19 out of 28 states have issued tariff orders for 2021-22, indicating sluggish progress.
- There is upward pressure on the cost of power supply for distribution utilities, due to the dominant share (around 70 per cent) of coal in the fuel mix for energy generation, the strengthening of imported coal prices and the possibility of domestic coal price revisions by Coal India.
As a consequence, a cost-reflective tariff determination process, coupled with the timely pass-through of power purchase costs, remains critical for the utilities. In addition, the delicensing initiative proposed by the central government can effect significant changes in the distribution segment, facilitating competition and placing emphasis on the quality and reliability of power supply and consumer services. However, strong political will and support from state governments are needed to ensure movement on all these issues.
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)
- SAUBHAGYA 2014/2017, Smart Grid Pilot project, 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.
- Government's announcement of the launch of UDAY 2.0 seeks installation of smart prepaid metres, prompt payment by discoms, making coal available for short term and reviving gas-based plants.
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