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Discom Distress

Discom Distress

The pandemic has pushed discoms deeper into the red, while the government’s big reform scheme UDAY has flopped. A new scheme has been announced, but will it work?

The NTPC power plant in Dadri, Uttar Pradesh The NTPC power plant in Dadri, Uttar Pradesh

The scheme -- Reforms-Linked, Result-Based Scheme for Distribution (RLRBSD) -- will provide assistance to discoms for infrastructure creation, including pre-paid smart metering, feeder separation (supply of electricity to agricultural and non-agricultural consumers) separately and upgradation of systems tied to financial improvements. It targets reducing electricity supply (AT&C) losses to 12-15 per cent, and the gap between cost and revenue to zero by FY25. Unlike in the past, discoms will get their share of grant from the government at the end of the year, only if they achieve their pre-set targets for the year. It is expected to usher in long-pending reforms in a sector reeling under heavy debt and payment overdues.

Coronavirus-induced lockdowns over the past one year have made matters worse. India's power consumption fell for the first time in 35 years to 1271.54 billion units in FY21, since industries could only operate intermittently in many parts of the country after the lockdown was lifted.

Already reeling under heavy debt, it came as a bolt from the blue for discoms. The fall in demand was particularly severe in the higher-tariff industrial and commercial segments, which are used to cross-subsidise lower-tariff residential users. According to ICRA Analytics estimates, monthly revenue loss of discoms due to reduced industrial and commercial demand was over Rs 16,000 crore.

It resulted in a surge in overdues. From under Rs 24,000 crore in April 2017, dues to power producers trebled to over Rs 90,000 crore in April 2021. Aggregate debt, which had fallen to around Rs 2 lakh crore in FY17 is estimated to have more than doubled to an all-time high of Rs 4.51 lakh crore in FY21. It is projected to increase further to around Rs 4.87 lakh crore in FY22, according to CRISIL. In absolute terms, it is one of the biggest drags on government resources, far in excess of its annual fertiliser subsidy of Rs 80,000 crore.

"Covid has not helped the situation at all," says Rajesh Ivaturi, Partner, Power and Utilities, EY India. "Lowpaying customer segment (residential) has remained the same or has grown marginally, but the high-paying industrial consumer segment has declined. Discom financials have gone for a toss."

Even by their low standards, these are ominous times for discoms. This is not the first time that the government has tried to rid the system of inefficiencies. From time to time, bailouts have been given. Realising the potential impact of the lockdown on discoms, Sitharaman had announced a Rs 90,000-crore relief package in May last year itself. It was subsequently increased to Rs 1.2 lakh crore and finally to Rs 1.35 lakh crore. Yet, these are only temporary measures aimed at lessening some of the immediate impact of the pandemic. Structural problems in discoms pre-date Covid and need a comprehensive and radical overhaul.

The Failure Of UDAY

The government has tried to fix the problem a number of times. Back in 2001/02, a grid collapse prompted Montek Singh Ahluwalia to work out a bailout package for discoms through long-term bonds issued by state governments. More than a decade later, a similar Northern Grid failure in the summer of 2012 gave way to another relief package -- the Financial Restructuring Plan (FRP). The latest was in 2015 when the ambitious Ujjwal Discom Assurance Yojana (UDAY) scheme was announced.

"The frequency of bailouts has obviously increased. The first one was in 2002, the next one a decade later. Then came UDAY in end 2015 and in 2020 again the government had to come up with a relief package," says Sudhir Kumar, Associate Director, Care Ratings.

Discoms' troubles stem from two factors -- their inability to bring down transmission and distribution (T&D) losses and raise tariffs in line with rising costs. Both can impact households in the country and since power is under state control, raising tariff is a political hot potato as well.

Under the UDAY scheme, state governments took over 75 per cent of the accumulated debt of discoms valued at around Rs 4 lakh crore to reduce their interest burden. Power utilities were encouraged to initiate reforms like reducing AT&C (aggregate technical and commercial) losses by 900 basis points to about 15 per cent in 2018/19, and also implement regular tariff hikes of 5-6 per cent per annum.

The reduced interest burden did improve the financial health of discoms in the first few years, but progress on structural reforms was tardy. From high AT&C losses of 25.72 per cent in FY15, it came down to only 22.01 per cent in FY19, the cut-off year for UDAY, missing the target by a wide 7 percentage points.

The gap between average cost of supply (ACS) and average revenue realised (ARR), a key parameter that reflects the health of discoms, also went down initially from 0.84 in FY13 to 0.17 per unit in FY17, but went up thereafter to 0.44 per unit in FY19. Under UDAY, the target was to negate it.

"The main reason is that the tariff they charge from customers is lower than the average cost of power purchase. While some gaps are met through subsidies by state governments and cross-subsidies, there is still some amount that is not compensated by any and sits on discom books as regulatory assets. Further, subsidies are not paid on time by state governments and that adds pressure on discoms to do additional borrowing to meet working capital requirements," says Vibhuti Garg, Energy Economist, Institute for Energy Economics and Financial Analyses. "While discoms need to raise tariffs on an annual basis, many discoms have not raised tariffs for many years, though their costs have gone up, thereby widening the gap between their average cost of supply (ACOS) and ARR," she adds.

Privatisation Drive

One of the most talked about solutions is to privatise more and more discoms in the country. It is an experiment that has yielded positive results in many cities, including Delhi, Mumbai, Kolkata and Ahmedabad. Before it was privatised in 2002, AT&C losses in the national capital were at a high 53 per cent and the government was subsidising discoms to the extent of Rs 12,000 crore every year. After privatisation losses came down, and today Delhi has one of the lowest AT&C losses among discoms in the country at just 8 per cent.

"Delhi is a prime example of how privatisation works in the sector. We have invested in technology and improved service quality. Not just us, private discoms in general have displayed high efficiency standards. Our track record makes for a good case for privatising more discoms in the country. The biggest advantage of privatisation is it brings in greater accountability, which in turn improves efficiency," says Sanjay Banga, President, Transmission and Distribution, Tata Power.

"UDAY did not succeed and anything we do in future should take into account the lessons from it," says Former Chief Economic Adviser Arvind Subramanian. "Privatisation of discoms is definitely one of the ways to solve it, but expectations need to be realistic. The fact of the matter is that the underlying politics of power has not changed significantly."

Everything comes down to making it conducive for discoms to do business through policy certainty and autonomy in pricing decisions. The power connection portability concept that the new RLRBSD scheme seeks to facilitate and for which the prevalent Electricity Act 2003 needs to be amended, would also work only when more players, including from the private sector, join the ring to give more options to consumers. Without these enabling provisions, even privatisation may not work.

"Any model succeeds only when the overall ecosystem is aligned, including regulatory certainty and availability of financial support," says Amal Sinha, CEO, Rajdhani Power. "There should be no discrimination between private and public sector discoms. Give the latter the same level of freedom and they will do well too."

One of the potential solutions that has gained currency in recent times is direct transfer of subsidy into bank accounts of consumers. Increased penetration of formal banking through Jan Dhan accounts in the society makes it, at least theoretically, a plausible alternative. This can open the doors for discoms to raise tariffs.

"Entitlements are difficult to do away with -- power subsidy for agri sector has to be given. Around 100 units for households are required. We should look at eliminating subsidies and replacing them with cash transfer," says former bureaucrat Ajay Shankar who played a key role in the enactment of the Electricity Act 2003. "We should not shy away from privatisation, especially in states where governance is weak. Also, multiplicity of tariff has to be done away with."

Cross-subsidy acts as a double whammy for discoms. Supplying power to industrial consumers is cheaper than to agricultural or residential users, yet the tariff is the highest for them. For the latter, cost for discoms is high but tariff is low, leaving them with no other choice but to squeeze industrial consumers.

"It makes manufacturing in the country uncompetitive," says R.C. Bhargava, Chairman of Maruti Suzuki India Ltd. "India has one of the highest rates of industrial power in the world. It undermines our aspiration to become a manufacturing superpower."

But unlike LPG, implementing direct cash transfer for power may not be easy. "It will be difficult as it is a different ballgame in the power sector compared to LPG," says Shubhadeep Sen, Chief Financial Officer, Gujarat Urja Vikas Nigam. "It is a good proposal, but I don't think the government will do it. It is not very practical as of now."

Smart Metering

The use of technology can help solve some of the sticky issues. Electricity billing is one of the few services where collection happens after consumption, compared to advance payments like in the case of petrol or LPG. Prepaid meters are one of the ways in which this can be reversed. It will reform billing and collection procedures as well. Smart meters are an intrinsic part of the government's RLRBSD scheme, where there is a grant of 15 per cent of the cost (capped at Rs 900) for every smart prepaid meter.

Already, thousands of such meters have been installed across the country and the results are encouraging. In a state like Bihar, for example, which has a high 42.34 per cent AT&C loss ratio, state-run Energy Efficiency Services has installed 25,000 smart prepaid meters. This has resulted in daily recharge revenue of Rs 5 lakh for the discom. More than 60 per cent consumers are recharging their credit balance through mobile application, with Rs 20 per day on an average.

Bihar is not a one-off case. All other states where smart meters have been installed have shown handsome results, with an average 25 per cent increase in billing and 95 per cent rise in billing efficiency. Even in the New Delhi Municipal Council (NDMC) area, which already has a high billing efficiency of over 99 per cent, revenue has gone up by Rs 500 per month per meter. EESL says it could amount to an additional revenue of Rs 1 lakh crore annually. According to CRISIL, an investment of Rs 65,000 crore is needed for the full transition from traditional to smart meters in the country.

"The situation has served to reinforce the efficacy of smart meters by eliminating manual interventions," says Saurabh Kumar, Executive Vice chairperson, EESL Group. "The benefits of smart metering, beginning with a seamless online billing process, real-time tracking of electricity usage, and reduction of billing errors have cascaded down the energy value chain to consumers. It has translated into energy and capital savings for consumers while leading to enhancement of operational efficiency for utilities."

Sun To The Rescue

While smart prepaid meters can help solve one part of the problem, of errant billing and collection, the other aspect of high cost can be partially solved by renewable power, especially solar. In the latest solar auction in December last year, India's solar power cost, already the lowest in the world, hit a new low of Rs 1.99 per unit. Just a month before, prices had come down to Rs 2 per unit. With this, solar power cost in India has more than halved in the last six years from Rs 4.53 per unit in 2015. This has put other sources of power like thermal, in the shade -- solar power costs are 30 per cent lower.

A low-cost robust solar panel manufacturing industry in India will lead to lower cost of power for discoms. Most of India's fresh investments in the power sector are skewed towards renewable energy. The Central Electricity Authority's (CEA's) optimum generation mix report projects India's solar and wind to form 420 gigawatt (GW) of capacity, or 51 per cent of the total installed capacity, by 2030. The International Energy Agency (IEA) has predicted that by 2040 India is likely to add 900 GW of renewable capacity.

As the share of solar power increases, the cost for discoms will come down. So will the ACS-ARR gap. Investments in solar power have also proven to be more resilient. According to a study by CRISIL, power generation across 75 solar projects (with track record of more than three years) was better than estimates in 80 per cent of the cases.

It is one of the reasons that after the initial slowdown in capacity addition in solar during the lockdown in FY21, investments rebounded from October 2020 and are expected to gain further momentum going forward. According to ICRA, the sector added 5.9 GW of capacity in the first 11 months of FY21, which is expected to increase to 7.5-8.0 GW by March 2021. The segment remains the key driver of capacity addition in the RE sector and has surpassed wind power capacity for the first time in January 2021, it said.

For solar to work, it is important to build battery storage. Solar generation peaks during afternoon hours when demand is low on the grid. Batteries help store excess power and supply it during peak demand hours at night. Much like how solar floodlights work in cricket stadiums.

The cost of lithium-ion derived battery storage technology is also reducing like the cost of solar power. The cost of standalone lithium-ion battery systems globally has fallen from $1,100/kWh in 2010 to $137/kWh in 2020. It is projected to decline further to $58/kWh by 2030. In April 2020, the Lawrence Berkeley National Laboratory (LBNL) in the US estimated the total capital cost for a 1MW/4MWh standalone battery system in India at $203/ kWh in 2020, projected to hit $134/kWh in 2025 and $103/ kWh in 2030. When co-located with solar PV systems, the storage capital cost would be lower -- $187/kWh in 2020, $122/kWh in 2025 and $92/kWh in 2030.

Fortunately, India's battery storage capacity is growing. IEA's India Energy Outlook 2021 has predicted that by 2040 India may have 140-200 GW of battery storage capacity, the largest for any country.

But, there are a few headwinds as well. The fall in prices in every subsequent auction has a side-effect of many discoms deferring signing of Power Sale Agreements (PSA) with solar producers, hoping for a lower price. According to established practice, Solar Energy Corporation of India (SECI) acts as an intermediary, signing PSAs with developers before drawing up PSAs with discoms. However, SECI is finding it hard to get discoms to sign along the dotted line. Projects worth nearly 20 GW are in a state of limbo with solar-plus manufacturing tenders accounting for 63 per cent and plain vanilla solar tenders another 17 per cent.

"There are solutions available for each problem, but the major ingredient in all of them is strong political will," says Kumar of Care Ratings. "Some of the steps like raising tariffs and doing away with cross-subsidies would be painful in the short term, but need to be taken. The pandemic has offered the chance for some of the long-pending reform measures to be implemented boldly. That is the only way."

A combination of low-cost renewable energy, use of technology in smart prepaid meters with a liberal dose of privatisation can potentially break the high debt trap for discoms. It is up to policymakers to exploit the opportunity with conviction to see it through its logical conclusion.

But one thing is certain. India cannot afford to let its discoms bleed forever.