Power is a burgeoning contronym in the Indian scenario. While India has solidified its position as a power exporting country, India’s ailing energy sector is not to be missed on the flip side. As the power sector crunches under bad loans and stressed assets, the Indian government is striving to find a solution to its woes.
The Derailment of the State Electricity Boards (SEBs)
The power sector and its divisions have been reeling under tremendous financial pressures, owing to their operational and financial inefficiencies. Distribution Companies (DISCOMs), a critical part of the power sector, has attracted most of these problems. According to a report published by The Energy and Resources Institute (TERI), the power sector has over Rs. 1 Lakh crore as bad debt as of October 20191. These uncollectible loans account for approximately 0.6% of the country’s Gross Domestic Production.
Electricity distribution companies are the weakest link in the country’s power supply chain, losing almost a fifth of their revenue because of several technical and commercial reasons (AT&C), including loss of power supplies due to electricity theft, inadequate transmission infrastructure, and inefficient billing and collection.
Unfortunately, these errant entities are bailed out time and again as they rampantly indulge in misspending taxpayer’s money. The losses incurred by the SEBs have jumped by 83% in 20192, a statistic prevalent in days before the government’s UDAY scheme was launched. Under this generous scheme, States will take over almost 75 percent of the debt of their respective discoms. The state governments then issued ‘UDAY bonds’ for sale to banks and other financial institutions in order to raise money to pay off the lending banks. Unfortunately, the lending banks have taken a hit and none of the efficiency targets set for the power sector has been achieved. While the reforms targeted to slash the level of Aggregate Technical & Commercial losses (AT&T) at 15 per cent, the losses were at an all-time high of almost 22% in late 2019, only slightly lower than the previous check period. Moreover, the gap between Average Cost of Supply and Average Realisable Revenue (ACS-ARR gap) continues to widen and remains at an average of Rs. 0.52 per unit currently. In states like Andhra Pradesh and Bihar, the ACS-ARR gap is over Rs. 2.5 per unit.
Apart from functional and operational inefficiencies, the revenue collection and billing systems remain a huge loophole. In order to ensure that their vote bank (consisting of farmers, small businessmen, and rural employees) remains strong, State governments offer electricity at highly subsidized rates and are reluctant to impose or increase tariffs. However, discoms are seldom provided with the timely compensation of the same.
The complacency on the part of the States arises because they know and acknowledge that discoms will always be bailed out, otherwise causing the lending entities loads of financial trouble. Subsequently, power utilities account for over 60 per cent of the total outstanding borrowing guarantees of these States. For some states, this statistic is over 80 percent.
Resolving the Matter
It is imperative to improve the performance of discoms by bringing down the AT&C losses at a 12-15 percent level across the country and gradual but complete elimination of the ACS-ARR gap by FY25. Additional release of funds by the Centre should happen only after the operational efficiency and performance targets are on track. Otherwise, the open-hearted financial package worth almost Rs. 90,000 crores to help discoms repay their debts, will go in vain. Before the second tranche of this financial assistance package is disbursed, discoms must prove that they are on track to clear their dues in three years and have started building upon the government listed efficiency parameters. The fact is that even with penalties in place, states are able to comfortably run away from the matter. Despite the existence of a ratified power agreement that calls for debiting a state’s balances with RBI, if its discom fails to pay back PSUs like National Thermal Power Corporation Ltd. (NTPC) within a specified time, the states seem less troubled by it. Although some state-owned discoms owed NTPC large sums, of around Rs 10,000 crore, at the end of March 2020, the NTPC did not approach the RBI for matter resolution. Following this, there is an urgent requirement for such an agreement for private sector power generation companies (gencos). Unlike the PSUs who can be persuaded not to take the RBI route, the same would not hold true for these private sector gencos who would sell electricity to the discoms or SEBs. The slugabed States will wake up from the sleep of negligence and complacency only when the state’s balances will be debited with the RBI.
