Column: Fixing discoms’ finances

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Updated: July 9, 2015 1:13:16 AM

Instead of bailouts for state-owned discoms, power retail must be run on commercial principles.

The Indian power sector is witnessing a strange situation. A look at the power exchange reveals that energy prices have dropped to as low as less than R1/kwh—lower than the cost of generation, meaning there is surplus power but no takers. This situation can arise when there is surplus generation capacity or the Discoms are not buying power. On the contrary, the consumption of electricity is meagre 1,000 units/capita against the world average of about 3,000 units. This reveals that discoms are not buying power due to poor financial health rather choosing load-shedding.

The power sector has come a long way since Independence, from 1,300 MW to over 2,70,000 MW in generation capacity and from 2,700 km of 132 kV to more than 7,00,000 km transmission lines upto 1,200 kV level and from 3,000 villages/towns to nearly 5,72,000 electrified today.

Commendable progress has been made after the enactment of the Electricity Act 2003 for reforms and restructuring to bring competition and efficiency, including a vibrant electricity market. The new government has taken a large number of initiatives to resolve the pending issues pertaining to coal, gas, nuclear and renewable energy.

In the distribution area, several measures, such as RGGVY, R-APDRP, etc, were taken earlier by the successive governments at the Centre with the objective of “power to all” by 2012, but the dream could not be realised. However, the new government has come out with a new vision and shows greater vigour in its schemes such as DDUGJY, IPDS, Smart Grid, 24×7 power supply, etc.

In order to bring competition in distribution, the government has taken incremental measures like amending the Electricity Act to separate retail supply and wire activity—this brings in a new era of competition and efficiency in electricity market, given the customer can choose/change the supplier, much like the scene in the telecom sector.

The sector seems to have been put back on the track. Areas such as generation, transmission, distribution network operation and retail supply, each can be considered as the wheels of a vehicle.

The government’s extensive involvement in generation and transmission has proved its efficacy. However, distribution and retail supply has continued to be vested with the states though electricity is a concurrent subject. For the past several years, the Union government has taken various steps for improvement through different schemes as well as bailout packages in the year 2001 (securitising of outstanding dues through bonds) and in 2013 (financial restructuring plan); however, these have not produced the desired result. It is pertinent to mention that the current average AT&C loss is about 25-26% against the overall achievable target of 10-15%. Thus, it is essential that the Centre makes concerted efforts on these fronts and not just support through schemes.

These are the issues that need to be addressed fast:

n Running of discoms on commercial principles: It has been reported that the average gap between the cost of purchase of power and the tariff charged by discom is about 82 paise, resulting in losses of about R86,000 crore per annum. The cumulative losses today stand at about R3 lakh crore. The health of the discoms is the most important issue that needs fixing.

One way could be that the Union government’s grants, under distribution schemes, be injected as equity and thus the government becomes a part of the management of the discoms, for a short while albeit. As soon as they become commercially viable, the equity of the Union government can be either transferred to the states at zero cost or disinvested. This will also facilitate the discoms to raise capital by 4-5 times. Further, a direct benefits transfer scheme, as is being done for LPG, wherein the discom shall bill the consumer on the basis of actual rates and the subsidy is passed on to the consumer directly through her bank account, needs to be introduced. The possibility of a holding company on a regional basis, i.e, covering more than one state, through a SPV of the central and state governments, can also be explored.

n Institution building: Discoms’ management should be at arms-length from the government. It is important for them to recruit young and talented professionals and blend them with experienced professionals for experience sharing and increase their focus on human resource development.

n Integration of new technology: The reliance on new technology should be stepped up so that the distribution segment is steered towards viability and the efficiency and power quality of distribution systems improves.

Outstanding payment-linked load-shedding needs to be introduced, just as there is cessation of services in the telecom sector for non-payment of bills or expiry of balance. For example, consumers who have arrears could be made the first segment to experience such load-shedding, followed by those who have made partial payment. Curtailment can also be prioritised, first for power circuit loads and then for lighting loads. This will encourage timely payments by consumers and also higher satisfaction. Low-cost smart meters can be used for this purpose.

It is important to understand that generation addition should be coupled with energy efficiency and demand-response mechanisms to meet the energy requirement of the country.

n Strong regulatory mechanism: Our country has established a very effective regulatory mechanism through the CERC, JERCs, State Regulatory Commissions. The need of the hour is for the regulators to be pro-active and ensure the operation of discoms on commercial principles.

The author is CMD, Power Grid Corporation of India.

Views are personal

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