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Government drives power sector reforms with key financial initiatives

August 25, 2023
Saloni Sachdeva Michael and Vibhuti Garg

Key Findings

In the last couple of years, the government has announced measures like differential time-based tariffs and penalties on the non-timely disbursement of subsidies to instil financial discipline in DISCOMs. 

The finance ministry has earmarked Rs1.4 trillion (US$17.3 billion) under additional borrowings in FY24 for states to undertake power sector reforms. This benefit can be availed if states implement specific reforms.

Increased competition through carriage and content separation, as well as DISCOM privatisation are some steps that can further boost the distribution sector.

Electricity distribution companies (DISCOMs) are the backbone of the country’s power sector. Their poor financial health can have a ripple effect on the efficient functioning of the electricity generation and transmission sector. For India’s growth momentum to stay intact, the efficient functioning of all three is crucial.  

India is on a path of strong economic growth. According to International Monetary Fund (IMF) estimates, its gross domestic product (GDP) could grow by 6.3% in the fiscal year (FY) 2025. The Central Electricity Authority’s (CEA) Optimal Generation Mix report for 2029-30 projects a peak electricity demand of 334.8 gigawatts (GW) and electrical energy requirement of 2,279.7 billion units (BU) for 2029-30. To meet this demand, India needs to add 777.1GW of capacity, including 251.7GW of coal and lignite, 292.7GW of solar photovoltaic, 99.9GW of wind and 53.8GW of hydro.

Given the uncertainty around DISCOMs being able to effectively cater to demand, Indian consumers, especially commercial and industrial (C&I), installed 77GW of captive installed capacity as of June 2022. Further, most residential consumers have backup power, which either runs on battery or diesel, adding to carbon emissions. In rural areas, people stack fuel like kerosene, solar home systems and solar pumps, in addition to the grid, to deal with erratic power supply.

The political economy is critical in determining the electricity tariff, with most states providing subsidies to agricultural and residential consumers. However, these subsidies are poorly targeted, adding to the financial woes of DISCOMs. As on 31 March 2021, DISCOMs had accumulated a deficit of Rs5,166 billion (US$62.6 billion).

Government initiatives

Over the years, the government has bailed out DISCOMs numerous times, but the impact on their financial health has been limited due to other deep-rooted problems such as inefficient tariff setting processes, delay in subsidy reimbursements, billing and collection inefficiencies, and poorly targeted subsidies. In the last couple of years, the government has announced several measures to instil financial discipline in DISCOMs – improved cash flows, a streamlined accounting process, differential time-based tariffs, strengthened demand projections and penalties on the non-timely disbursement of subsidies.

The recent amendment to the Electricity (Second Amendment) Rule 2023 aims to improve subsidy payments to DISCOMs by streamlining the accounting, reporting and billing processes. The amendment mandates that regulatory commissions must hike tariffs if state governments do not reimburse subsidies on time. By implementing a carrot-and-stick approach, the government hopes to ensure timely and transparent subsidy disbursements

Moreover, the government’s decision to implement Time of Day (ToD) tariffs for C&I consumers from 2024 onwards and smart prepaid meters’ installation will not only ease the strain on the grid during peak hours but also encourage responsible electricity consumption patterns and optimise costs. Shifting the power demand from evening to daytime can help reduce tariffs by tapping into solar power, and such measures can promote greater deployment of clean energy. 

With the help of the July 2023 CEA guidelines on power demand projections, DISCOMs can plan and optimise their operations, resulting in reduced losses and improved efficiency.

The implementation of all the above initiatives at the state level can help enhance transparency, efficiency and financial viability in the power sector. It could also attract investments for state-level power sector reforms.

The finance ministry has earmarked Rs1.4 trillion (US$17.3 billion) under additional borrowings in FY24 for states to undertake power sector reforms. This additional financial window depends on states implementing specific reforms, including transparency in the reporting of financials, timely rendition of financial/energy accounts and auditing, providing subsidies through direct benefit transfer (DBT) to consumers and achieving targets for reduction in Aggregate Technical and Commercial (AT&C) losses. States that privatise DISCOMs can borrow more.

Positive impact of reforms

These government initiatives are already creating a positive impact. The total outstanding dues of states to generation companies (GENCOs), which stood at Rs 1,205 billion (US$14.6 billion) on 3 June 2022, reduced to Rs610 billion (US$7.4 billion) on 24 July 2023. DISCOMs also started paying their dues in time to avoid penalties after the enactment of the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. IEEFA’s States’ Electricity Transition (SET) report shows considerable improvement by states in reducing their total overdue amount/owed payment ratio.

Another positive impact of the reforms has been the decline in AT&C losses. AT&C losses reduced from 23.7% in FY16 to 17% in FY21. Currently, India stands at 15.8%, according to the Ujjwal DISCOM Assurance Yojana (UDAY) dashboard. The government aims to further reduce losses by improving the billing and collection ratio by installing 25 crore smart prepaid meters for domestic consumers under the Revamped Distribution Sector Scheme (RDSS). Karnataka, Andhra Pradesh and Gujarat installed 100% of their sanctioned smart meters as of September 2022 under the National Smart Grid Mission.

These developments highlight the effectiveness of the government's initiatives in creating a stable and reliable power sector. Increased competition through carriage and content separation, as well as DISCOM privatisation, can further boost the distribution sector. Regulatory discipline, such as cost-reflective tariffs, cross-subsidisation reduction, regulatory asset management and subsidy delivery, need additional attention at the state level. States should also accelerate deploying energy-efficient technologies, smart grid solutions and digitisation solutions to optimise demand and boost revenue collection.

This article was first published by The Hindu Business Line

Saloni Sachdeva Michael

Saloni Sachdeva Michael is an Energy Specialist, India Clean Energy Transition at IEEFA. Saloni focuses on accelerating and sustaining the clean energy transition through policy, technology, and financial interventions.

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Vibhuti Garg

Vibhuti Garg is Director, South Asia, at IEEFA. Vibhuti’s focus is on promoting sustainable development through influencing policy intervention on energy pricing, adoption of new technologies, subsidy reforms, enhancing clean energy access, access to capital and private participation in various areas of the energy sector.

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