Energy

Powerless firms

The crippling discom business needs fundamental restructuring for a future in renewable energy

 
By Priya Sreenivasan
Last Updated: Friday 08 February 2019
The crippling discom business needs fundamental restructuring for a future in renewable energy
priya sreenivasan

Discoms, or distribution companies, hold the key to the future of renewable energy in India. Mostly state-owned, these companies purchase power from generators and sell them to residential, retail, agricultural, commercial and industrial consumers. The key concerns faced by the wind and solar energy sectors such as curtailment, payment delays, refusal to sign power purchase agreements (PPAs) with new plants are mostly connected to these companies. This points to the fact that discoms either drive growth or pose crippling problems.

The reason behind this is that most discoms have run huge financial losses and have poor operational performance. The country’s discoms had collectively accumulated losses of Rs 3.8 lakh crore and an outstanding debt of Rs 4.3 lakh crore by March 2015. Their inability to collect revenues from their customers due to power theft and lack of proper billing and collection makes it difficult for them to recover costs. They are further saddled with unsustainable tariff structures, slabs for different end users and associated cross-subsidies. This makes it unlikely that their business can break even.

Discoms are also bound to large thermal power plants by means of long-term PPAs, with two-part tariffs that have a fixed cost component. As a result, there is little incentive to offset thermal consumption with newer renewable power, even if the latter is cheap. In fact, a large renewable capacity with “must run” status might be adding pressure to the discoms. There have been multiple attempts to turn the situation around, with the latest being the Ujwal Discom Assurance Yojana (UDAY), introduced in 2015. It, however, remains a work-in-progress.

Scheme to cut down losses 

It was clear that all the plans for the electricity sector — 100 per cent electrification, uninterrupted and high quality power supply, and 175 GW of renewable generation absorbed by the network by 2022 — would suffer setbacks if the discoms continued in this vein. In November 2015, therefore, UDAY was introduced to restructure the discoms’ debt to make them financially stable and hold them accountable for their performance. It was proposed that state governments would take over 75 per cent of their respective discoms’ debts, with bonds issued for the remaining 25 per cent. Aside from the financial restructuring, the discoms were expected to improve their performance.

The aggregate technical and commercial (AT&C) losses partly reflect efficiency at the transformer and distribution network level. To cut down on this, UDAY mandated the installation of smart meters in rural and urban areas, and metering of transformers to track theft and identify leakages and points of low efficiency. UDAY planned to cut down the losses to an average of 15 per cent by 2018-19.

Three years on, the results of UDAY remain unclear and questionable. Many tasks are running behind schedule—especially smart meter installations. AT&C losses remain high, with some states indicating losses of over 40 per cent, a far cry from the 15 per cent target. The gap between average cost of supply (ACS) and the average revenue realised (ARR) continues to be high in most states.

As per the Union power ministry’s annual integrated ratings report, which assigns credit ratings to each company with respect to regulatory, operational and financial parameters, 42 discoms are under the scanner. The top rated discoms are concentrated in Gujarat. Uttarakhand is the only new entrant, while Punjab, formerly a highly rated discom, has deteriorated. At best, more discoms appear to be concentrated at the higher end of the average range as compared to the situation in 2014-15. The number of discoms in the worst performing bracket has quadrupled.

While credit ratings are by no means a foolproof and dependable indicator, it remains an indispensable source of information primarily considered by banks for assessing a discom’s credit worthiness.

Closing the gap

As per the UDAY dashboard in September 2018, overall AT&C losses indicate poor outcomes. It was expected that by March 2019, all the states would be able to close this gap and begin turning profitable. While there is still some way to go before this gap is completely closed, the last four years have seen improvement in terms of the average national performance.

On closer examination, only four states are recovering their costs incurred by supplying power, of which three—Rajasthan, Karnataka and Gujarat—are significant procurers of renewable energy. On an average, the states that are recovering their cost have relatively low AT&C losses.

Smart meters are touted as a viable solution to track electricity consumption, reducing losses by theft and improving billing and collection. Rajasthan, the best performing state in terms of the ACS-ARR gap, has 58 per cent smart meter installation rate for large consumers (over 500 kWh). Most states have made practically no headway on smart metering (see ‘Major faultlines’).

Installation of separate feeders for rural households and agricultural load aims to provide appropriate power delivery to farmers and also reduce misuse of subsidised electricity.

According to the UDAY dashboard, 25 of the 27 states and Union territories have made tariff revisions. But as per data of the consultancy firm KPMG India, the implementation of tariff increases (the terms of which are agreed to in individual state MoUs signed with the power ministry) is inconsistent. It is also unclear if the marginal increases in tariff have had material impact on the ACS-ARR gap, since costs have gone up.

Between 2013 and 2016, the over-all expenditure has increased every year. This is reflected in ACS. The largest component (over 60 per cent) built into the expenditure is the power purchase cost, which, historically, has increased annually. The operational costs, including employee salaries and administration expenses, have also seen an annual rise of 12 per cent in 2015-16 and 9 per cent in 2016 -17. The average 5 per cent tariff increase which is broadly agreed upon would be unlikely to compensate for this.

Reduction in the ACS-ARR gap can largely be attributed to the financial restructuring between 2016-17 and 2017-18. Delhi-based non-profit Centre for Science and Environment estimates that the interest component of the tariff for the period is 8 per cent of the total expense.

With the state government taking over the debt and reducing discoms’ interest payment, ACS has reduced. At a national level it would appear that the gap closure is attributable to financial restructuring. It undercuts the notion that discoms have made any real improvement. This lack of progress on the operational front is an indictment of UDAY and on rationalisation of tariffs.

Major faultlines

The Ujwal Discom Assurance Yojana, launched to revive energy discoms, has failed on most counts

Task

Stated deadline

Status as of October 2018

Smart metering for consumers with:

 

 

>200 kWh/month

December 2017

1%

>500 kWh/month

December 2019

3%

LED distribution to achieve savings totaling `40,000 crore

March 2019

100%

Feeder metering

June 2016

100%

Distribution transformer metering

June 2017

Rural 59%/urban 63%

AT&C losses down to 15%

March 2019

National AT&C losses: 23%

ACS-ARR gap down to `0/kWh

March 2019

National gap: Rs 0.27/kWh

Source: Ministry of Power


Big push for discoms

It is clear that the schemes to allow for clean energy penetration at a large scale are hinging on serious power sector reforms. UDAY seems likely to prove inadequate as discoms continue to be plagued by underperformance. What, therefore, is the way ahead?

The discom business needs to be fundamentally restructured. Governance needs to be improved with greater resilience to political influence. Robust mechanisms need to be put in place to ensure tariff rationalisation and follow-through on subsequent increases. Market-friendly electricity reforms need to be introduced and enforced. This includes expanding the role of short-term markets, as well as strict enforcement of PPAs to assure investors and developers of the legal sanctity of contracts signed with discoms.

Streamlining the open access process, with the fair application of additional surcharges will boost the demand for renewable energy from the commercial and industrial sectors.

Discoms will have to be pushed harder to invest in technical solutions and infrastructure upgrade such as feeder separation, installing smart meters and undertaking detailed data collection and analysis. The bottom-line is that a renewable energy future cannot be built on an outdated discom model. Fundamental changes are needed to redefine the role of discoms.

(Based on an assessment carried in ‘The State of Renewable Energy in India, 2019’ published by Delhi based non-profit Centre for Science and Environment)

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