Q) “Though India has ensured adequate production of electricity in the country, the DisComs continue to perform badly. “Examine the challenges in India’s discom sector. What measures can be taken to strengthen discoms?
Answer:
Distribution Companies (DisComs) play a critical role in the electricity supply chain. These utilities typically buy power from generators and retail these to consumers. India has done well in ensuring the adequate production of electricity in the country. However, the DisComs continue to perform badly because of following challenges in it
Financial position of DisComs:
- The financial position of DisComs is very grave in that they owe large sums to generators and also have high short-term dues apart from the long-term debt owed by them.
Inefficiency:
- The DisComs are blamed for inefficiency, including high losses, called Aggregate Technical and Commercial (AT&C) losses.
* Aggregate Technical and Commercial (AT&C) losses include everything from theft to lack of collection from consumers.
Lack of cost-reflective tariff structure:
- The regulators have failed to fix cost-reflective tariffs. This has resulted in high debts for the DisComs.
* Despite the acceptance of inefficiency in the name of the poor, yet still, they too do not get quality supply. The political dole out of free electricity even for those who may not deserve such support is a drain on the scant resources of the state.
- There are also extensive cross-subsidies between consumer categories which is not exactly the optimal way forward.
Default of payments to DisComs:
- DisComs face severe challenges of payables.
* Consumers owed DisComs over Rs. 1.8 lakh crore in FY 2018-19.
* State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.
* About a seventh of DisCom cost structures is meant to be covered through explicit subsidies by State governments.
Increasing competition:
- The growing easing of regulations in the sector allowing for third party suppliers under competitive models would result in increased competition in the business of electricity supply.
- The DisComs due to their inefficient functioning and large financial debt are ill-equipped to take on the competition offered by the new entrants.
Disruption caused by pandemic:
- COVID-19 has completely shattered incoming cash flows to utilities due to the multi-month dip in demand.
- The reduced demand for electricity did not save as much costs for the DisComs because a large fraction of DisCom cost structures is locked in through Power Purchase Agreements (PPAs) that obligate capital cost payments, leaving only fuel savings with lower offtake.
Measures to strengthen discoms
There is a need for a much larger liquidity infusion than has been announced thus far.
- The growing debt has to be paid down to manageable levels. This calls for a haircut in DisComs’ debt obligations.
- In the long term, all the risk and future obligations should not be placed on DisComs alone. Generators, transmission companies, and lending institutions must all chip in.
- Need to reduce AT&C losses through appropriate technical and regulatory practices.
- Need a complete overhaul of the regulation of electricity companies and their deliverables. The regulators must allow cost-covering tariffs. The regulation should meet the national needs of quality, affordable, and sustainable power.