Power distribution in India is by and large a state-owned monopoly and remains the weakest link in the power sector value chain despite a number of measures taken by the government to address issues over the years.
By Vivek Sharma
Power distribution in India is by and large a state-owned monopoly and remains the weakest link in the power sector value chain despite a number of measures taken by the government to address issues over the years. The CRISIL InfraInvex indicates as much in the weak category, with a score of 5.6 (on a scale of 10, where 1 indicates least attractiveness) for the sector in October, 2018.
The Ujwal Discom Assurance Yojana (UDAY), a key reform measure focused on a turnaround through cost reduction and improvement in operational efficiency, has yielded some good results directionally on operational and financial fronts. Between fiscals 2012 and 2019, the aggregate technical and commercial (AT&C) losses have been reduced from ~27% to ~20% and cost recovery has improved, with the gap between the average cost of supply (ACS) and average revenue realised (ARR) down to `0.34/unit from `0.76/unit earlier.
Though AT&C losses have generally trended down, data on UDAY as of December, 2018 shows that some of the major states continue to lag. Further, if one looks at individual states, the picture is far from rosy, raising a fair chance of these states missing the UDAY targets. It is quite possible the situation has been aggravated because of the addition of subsidised consumers to the grid under the Saubhagya Scheme.
The true cost of supply today is way too high for low-tension, or agricultural and domestic consumers, and this for two reasons: more money being needed for last-mile connectivity, and more losses. Here’s another perspective: if the ACS-ARR gap is `0.34 per unit at present, the yearly loss made by utilities would be `40,000-45,000 crore. Though this is less than the ~`55,000 crore annual losses prior to UDAY, a discom turnaround appears distant.
There are multiple reasons why this is so. For instance, state regulators have not allowed a complete pass-through of AT&C loss targets to consumers.
Many discoms haven’t even proposed appropriate tariff hikes. And theft, pilferage and collection inefficiency, often with political connivance, have led to commercial losses piling up.
There is hence a need to ring-fence the management of discoms from political interference. In fact, the government should act as just a facilitator in the power business. This would allow its resources to be utilised effectively and efficiently to meet its social and economic objectives.
Public private partnership could play a critical role here. For, barring in Odisha, private discoms have been successful, having managed relatively superior operating and financial performance in Kolkata, Delhi, Mumbai, Ahmedabad, Surat and Greater Noida. Delhi, for one, is a success story with reduction in AT&C loss from ~50% as of fiscal 2002 to below 13% as of fiscal 2016.
Despite this, unfortunately, no new circle has been fully privatised in the last decade. State-owned discoms have tended to adopt the distribution franchise (DF) PPP model, which allows them to retain control over tariffs while bringing in efficiency and management expertise through the private sector. But not all DFs have been successful. Of the 18 DFs awarded so far, only 11 are operating in four states—Maharashtra, Uttar Pradesh, Odisha and Rajasthan.
In this context, we see three imperatives to boost private participation in the sector. First, improve the quality of baseline data. An independent audit by a third party must be undertaken prior to an award to a private player, establishing the baseline data accurately for tariff and subsidy determination. Odisha was unsuccessful because of this, whereas Delhi and Bhiwandi, which conducted rigorous pre-work for the purpose, did better.
Second, tailor robust PPP models and risk-sharing mechanisms based on market conditions in the division/circle, with complete clarity on tariff pass-through and provision of subsidy. Subsidy delivery via Direct Benefit Transfer would enable targeting of subsidies and an improvement in accountability, besides boosting the implementation of Universal Supply Obligation (USO).
Third, provide adequate scale (sizeable investment potential and higher responsibility) to attract private players. Alternatively, high-density areas can be carved out for monetisation. As this would mean leaving the residual areas with the existing licensee, with a fair chance of adding to their woes, a cess or surcharge can be imposed on consumers in high-density areas as compensation over and above the proceedings made through monetisation.
The revenue from monetisation of high-density areas and the cess thereon can be utilised for subsidising operations in residual areas.
These steps can create a conducive environment for private sector participation, with a win-win for all stakeholders – reliable and round-the-clock power supply for consumers and quicker turnaround for power distribution utilities.
The writer is Senior Director, CRISIL Infrastructure Advisory