Unshackling the distribution business in India
ECONOMY & POLICY

Unshackling the distribution business in India

While carrying out reforms, the government must ensure that they have a statutory foundation to ensure its binding nature. Vishnu Sudarsan, Abhishek Munot, and Samikrith Rao explain what the FM could do this year for discoms.

_______

At the heart of problems plaguing the power sector for years now is the distribution of electricity. It is estimated that more than Rs. 3.5 lakh crore are owed to discoms in terms of receivables, and more than Rs. 1.4 lakh crore are owed by discoms to generators. This year debt levels of discoms are expected to rise beyond Rs. 2.6 lakh crore and appear to be without a clear path to resolution. The aftermath of such factors may impact the approximately Rs. 1.15 lakh crore of Non-Performing Assets(NPAs) hanging in balance.

This has resulted in a balance sheet problem together with a creditworthiness crisis that threatens to deteriorate the health of not only the power sector, but the financial sector as well.

The causes for this are manifold—primarily, operational and financial inefficiencies, lack of a cost-reflective tariff, regulatory delays, and so on. India has the dubious distinction of suffering around 30-45% in distribution and transmission losses, the highest in the world. Theft of electricity is estimated to cost the discoms around 1.5% of India’s GDP. Despite such losses, discoms are unable to charge cost-reflective tariffs because of political and regulatory hurdles.

To tackle this problem, several reforms have been attempted over the years, ranging from proposed amendments to the Electricity Act, debt restructuring, mandating certain payment norms to varying modes of privatisation. While structural reforms in the form of legislative amendments are yet to be passed, the central government in 2015 put in place the Ujwal Discom Assurance Yojana (UDAY) to tackle the ballooning debt of discoms. Under UDAY, state governments took over 75% of the existing debt of discoms through issuance of bonds which mature in 10-15 years. In return, discoms were to cut costs, reduce line losses, tackle theft and fix faulty meters. While appearing promising in 2015, the persisting structural and operational problems have led to debt reaching pre-UDAY levels today despite resolution under UDAY.

The privatisation efforts story

Considering the ever-deteriorating debt situation compounded by Covid-19, the Atmanirbhar Bharat package once again attempted to infuse liquidity into discoms. Such liquidity infusion was tied to performance improvements, in a flashback to UDAY. At the same time, there was a push for privatisation. A model draft Standard Bidding Guidelines (SBG)—a blueprint for privatising state discoms going forward—was released. The central and state governments will need to collaborate along with the regulators to effectively implement these guidelines. The government will also have to ensure that they come up with a financial restructuring plan that addresses the concerns of all stakeholders.

The franchise model. To avoid bankrolling revenue gaps again, the government seeks to push the privatisation agenda to avoid a third iteration of UDAY. A range of privatisation options can be considered, from distribution sub-licensee, franchising, public-private partnership (PPP), and complete privatisation. While successful private discoms existed before, the route of a distribution franchisee has been preferred lately, possibly due to political palatability. While some franchisees have been successful, there have been a few which have not taken off or shut down due to lack of stakeholder support or other reasons. The PPP model has delivered expected results in Delhi, once considered the power theft capital of the world with losses at around 55%. Those losses have now come down to under 15%.

Structural reforms through legislation

While privatisation may be inevitable, required structural reforms in the form of legislative changes must not be lost sight of.

  • The introduction of models of separation of wires and content, first mooted in 2014, would open further avenues for efficiency, increased consumer choice and competition.
  • Subsidies must be mandated to be in the form of a direct cash transfer which completely bypasses the accounts of the discom.
  • Cross subsidisation must be done away with or be substituted by direct subsidies.
  • Regulators must be strengthened and mandated to determine a cost reflective tariff in a time bound manner. Regulators must be kept away from political influence and their independence must be ensured. This will ensure a solvent path ahead for the discoms, so that private capital can be attracted.

While it is necessary to tackle this crisis urgently, experience has shown that a positive impact may not be forthcoming if all stakeholders are not on board. Thus, extensive consultation must be undertaken while putting a structural reform into motion.

While carrying out reforms, the government must ensure that they have a statutory foundation to ensure its binding nature. These reforms must also be tied in with the inevitable changes flowing over the sector, such as increased use of infirm renewable energy, proliferation of hybrid storage technologies and adoption of smart meters and smart grids.

Perhaps, that may ensure that good money is not thrown after bad money yet again.

Authors: Vishnu Sudarsan is a Partner; Abhishek Munot is a Partner; and Samikrith Rao is an Associate at J Sagar Associates. Views are personal.

Image: pvproductions

While carrying out reforms, the government must ensure that they have a statutory foundation to ensure its binding nature. Vishnu Sudarsan, Abhishek Munot, and Samikrith Rao explain what the FM could do this year for discoms. _______ At the heart of problems plaguing the power sector for years now is the distribution of electricity. It is estimated that more than Rs. 3.5 lakh crore are owed to discoms in terms of receivables, and more than Rs. 1.4 lakh crore are owed by discoms to generators. This year debt levels of discoms are expected to rise beyond Rs. 2.6 lakh crore and appear to be without a clear path to resolution. The aftermath of such factors may impact the approximately Rs. 1.15 lakh crore of Non-Performing Assets(NPAs) hanging in balance. This has resulted in a balance sheet problem together with a creditworthiness crisis that threatens to deteriorate the health of not only the power sector, but the financial sector as well. The causes for this are manifold—primarily, operational and financial inefficiencies, lack of a cost-reflective tariff, regulatory delays, and so on. India has the dubious distinction of suffering around 30-45% in distribution and transmission losses, the highest in the world. Theft of electricity is estimated to cost the discoms around 1.5% of India’s GDP. Despite such losses, discoms are unable to charge cost-reflective tariffs because of political and regulatory hurdles. To tackle this problem, several reforms have been attempted over the years, ranging from proposed amendments to the Electricity Act, debt restructuring, mandating certain payment norms to varying modes of privatisation. While structural reforms in the form of legislative amendments are yet to be passed, the central government in 2015 put in place the Ujwal Discom Assurance Yojana (UDAY) to tackle the ballooning debt of discoms. Under UDAY, state governments took over 75% of the existing debt of discoms through issuance of bonds which mature in 10-15 years. In return, discoms were to cut costs, reduce line losses, tackle theft and fix faulty meters. While appearing promising in 2015, the persisting structural and operational problems have led to debt reaching pre-UDAY levels today despite resolution under UDAY. The privatisation efforts story Considering the ever-deteriorating debt situation compounded by Covid-19, the Atmanirbhar Bharat package once again attempted to infuse liquidity into discoms. Such liquidity infusion was tied to performance improvements, in a flashback to UDAY. At the same time, there was a push for privatisation. A model draft Standard Bidding Guidelines (SBG)—a blueprint for privatising state discoms going forward—was released. The central and state governments will need to collaborate along with the regulators to effectively implement these guidelines. The government will also have to ensure that they come up with a financial restructuring plan that addresses the concerns of all stakeholders. The franchise model. To avoid bankrolling revenue gaps again, the government seeks to push the privatisation agenda to avoid a third iteration of UDAY. A range of privatisation options can be considered, from distribution sub-licensee, franchising, public-private partnership (PPP), and complete privatisation. While successful private discoms existed before, the route of a distribution franchisee has been preferred lately, possibly due to political palatability. While some franchisees have been successful, there have been a few which have not taken off or shut down due to lack of stakeholder support or other reasons. The PPP model has delivered expected results in Delhi, once considered the power theft capital of the world with losses at around 55%. Those losses have now come down to under 15%. Structural reforms through legislation While privatisation may be inevitable, required structural reforms in the form of legislative changes must not be lost sight of. The introduction of models of separation of wires and content, first mooted in 2014, would open further avenues for efficiency, increased consumer choice and competition. Subsidies must be mandated to be in the form of a direct cash transfer which completely bypasses the accounts of the discom. Cross subsidisation must be done away with or be substituted by direct subsidies. Regulators must be strengthened and mandated to determine a cost reflective tariff in a time bound manner. Regulators must be kept away from political influence and their independence must be ensured. This will ensure a solvent path ahead for the discoms, so that private capital can be attracted. While it is necessary to tackle this crisis urgently, experience has shown that a positive impact may not be forthcoming if all stakeholders are not on board. Thus, extensive consultation must be undertaken while putting a structural reform into motion. While carrying out reforms, the government must ensure that they have a statutory foundation to ensure its binding nature. These reforms must also be tied in with the inevitable changes flowing over the sector, such as increased use of infirm renewable energy, proliferation of hybrid storage technologies and adoption of smart meters and smart grids. Perhaps, that may ensure that good money is not thrown after bad money yet again. Authors: Vishnu Sudarsan is a Partner; Abhishek Munot is a Partner; and Samikrith Rao is an Associate at J Sagar Associates. Views are personal.Image: pvproductions

Next Story
Resources

Madhya Pradesh Champions Inclusive Tourism at Heritage Sites

On the occasion of World Heritage Day, Madhya Pradesh is taking a significant step toward inclusive tourism by making its historical sites accessible to all — especially persons with disabilities. The state is rolling out its ‘Accessibility Infrastructure and Development’ project at Maheshwar, Mandu, Dhar, and Orchha, aiming to create a more welcoming experience at these iconic cultural destinations.The initiative, under the leadership of Chief Minister Dr Mohan Yadav and Tourism Minister Shri Dharmendra Bhav Singh Lodhi, includes infrastructure upgrades such as ramps, Braille signage, w..

Next Story
Resources

Runwal Realty Onboards Sonam Kapoor as Brand Ambassador

Real estate major Runwal has unveiled a refreshed identity as Runwal Realty, signalling a renewed commitment to crafting spaces that stand the test of time. With this refresh, the brand unveils its new philosophy: “Building for Generations to Come” and welcomes Bollywood star and global fashion icon Sonam Kapoor as its brand ambassador. This evolved identity reflects Runwal Realty’s commitment to creating not just homes, but heirlooms—crafted through visionary design, meticulous planning, global design expertise and an unwavering focus on quality. With the customer at its core, each de..

Next Story
Infrastructure Urban

Emerging Trends in Infrastructure and Transport 2025: KPMG

KPMG’s latest report, The Great Reset: Emerging Trends in Infrastructure and Transport 2025 edition, sheds light on the profound changes transforming the global infrastructure landscape. As industries adapt to the challenges posed by climate change, economic pressures, and technological advancements, the report identifies key trends and provides actionable insights for leaders in infrastructure and transport sectors. “In today’s interconnected world, the lack of standardized supply chain practices is not just an operational challenge—it’s an environmental and economic one. We’..

Advertisement

Advertisement

Subscribe to Our Newsletter

Get daily newsletters around different themes from Construction world.

STAY CONNECTED

Advertisement

Advertisement

Advertisement

Advertisement

Talk to us?