Discom debt at Rs 6 trillion; negative outlook on power distribution: ICRA
The consolidated debt of state power distribution companies (Discoms) has been estimated at Rs 6 trillion in FY 2021-22, according to ICRA (Investment Information and Credit Rating Agency of India Limited). This is in addition to Rs 1.27 trillion pending discom payables to power generators as of December 2020 – 30 percent higher on a year-on-year basis.
One of the reasons – perhaps the most prominent after mismanagement – for the worthless credit profile of discoms has been mounting technical and commercial (AT&C) losses compared to regulatory norms, inadequate tariffs in relation to their cost of supply and adequate subsidy support from the respective state governments. Politicians’ election promises of supplying free electricity to the poor and farmer households are another.
India’s T&D losses have been over 20 percent of generation, which is more than twice the world average. The ideal level of T&D losses ranges between six to eight percent. the Economic Survey for 2020-21. The Economic Survey of 2020-21, tabled in parliament on the eve of the 2021-22 budget presentation, has flagged the T&D losses as electricity generated but not reached the intended customers.
“Such high level of liabilities (debt plus dues to generation companies or Gencos) is unsustainable for the discoms and in turn for the growth of the power sector as such”, said ICRA, and has thus maintained the negative outlook on the power distribution segment. However, it has found the credit profile of several privately-owned discoms healthy supported by superior operating efficiencies, favourable demographic profile and timely pass-through of cost variations to consumers.
The rating agency said that implementation of reforms in the distribution segment is essential that could either be through privatisation or through delicensing as proposed by the government. However, a strong political will and support from the state governments is required for the implementation of such proposals given the statutory position of power as a concurrent subject. Further, delicensing would require suitable amendments to the Electricity Act as well as requisite policy and regulatory clarity in respect of division of wires and supply business and tariff determination process for the incumbent and new licensees, said ICRA group head and senior vice president – corporate ratings Sabyasachi Majumdar.
The recent announcement of revamped reforms-based result-oriented scheme in the Budget 2021 with an outlay of over Rs 3 lakh crore to be spent over five years is directionally positive with the intent to improve the viability of state owned discoms. A major part of this outlay is expected to be towards smart meters and upgrading distribution infrastructure. The state-owned discoms could thus look at multiple measures to achieve a reduction in book loss levels through improvement in distribution loss levels by use of smart meters, use of distributed solar projects for supply of power to agriculture consumers and graded tariff hikes without any tariff shock to the consumers, ICRA said.
“A 1 percent reduction in distribution losses would thus lead to savings and hence the reduction in book losses by Rs 50 billion per annum on an all-India basis, on a marginal cost basis. Further, use of distributed solar power projects for supply to agriculture consumers through dedicated agriculture feeder route is estimated to entail significant savings (estimated at Rs 1.4 billion per GWh of agriculture load met through solar) to discoms through reduction in power purchase cost and lower distribution losses, given the highly subsidised nature of power tariffs to agriculture consumers. Apart from the improvement in operating efficiency, timely tariff determination process including true-up and implementation of fuel & power purchase cost adjustment framework remains critical for the discoms to ensure cost reflective tariffs,” said ICRA Ratings co-group head and vice president Girishkumar Kadam.
