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Why the govt had to inject money into the power sector?

Topics Covered: Infrastructure- energy.

Why the govt had to inject money into the power sector?

What to study?

For Prelims: Overview of power sector in India- stakeholders from generation to consumption, role of private players.

For Mains: Power sector- underlying challenges, policies to address them and need of the hour measures.

Context: As part of its strategy to bring India’s battered economy back on track, India will provide ₹90,000 crore liquidity injection for the fund-starved electricity distribution companies (discoms).

This is part of the first tranche to combat the economic disruption from the coronavirus lockdown, that has worsened the already precarious finances of power discoms.

How this works?

State-owned Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) will infuse the liquidity by raising an amount of about ₹90,000 crore from the market against the receivables of discoms. The state governments will provide a guarantee.

This one-time time liquidity infusion will be used to pay the central public sector power generation companies, transmission companies, independent power producers and renewable energy generators.

Why this was necessary?

Energy consumption, especially electricity and refinery products, is usually linked to overall demand in the economy.

With at least 10 states losing about a third of the power supplied to their consumers in distribution losses, their overdues have not only hit power producers, but have also contributed to stress in the banking sector.

Besides, the electricity demand load shifted to homes during the lockdown, resulting in lower realizations. With peak electricity demand coming down, commercial and industrial power demand has taken a hit after many factories shut down.

How the power sector works?

It is a three-stage process:

  1. First stage: Electricity is generated at thermal, hydro or renewable energy power plants, which are operated by either state-owned companies or private companies.
  2. Second stage: The generated electricity then moves through a complex transmission grid system comprising electricity substations, transformers, and power lines that connect electricity producers and the end-consumers. Further, each state has a State Transmission Utility (STU) along with private transmission companies which are responsible for setting up intra-state transmission projects.
  3. Third stage: This last mile link is where discoms come in, operated largely by state governments. However, in cities such as Delhi, Mumbai, Ahmedabad, and Kolkata, private entities own the entire distribution business or parts of it.

Discoms essentially purchase power from generation companies through power purchase agreements (PPAs), and then supply it to their consumers (in their area of distribution).

But, why financial situation of state discoms is in poor condition?

  1. In India, electricity price for certain segments such as agriculture and the domestic category is cross-subsidised by the industries and the commercial sector. This affects the competitiveness of industry.
  2. There is also the problem of AT&C (aggregate transmission and distribution losses), which is a technical term that stands for the gap between the cost of the electricity that a discom gets from the generating company, the bills that it raises and the final realisation from the collection process from end-consumers.


Prelims Link:

  1. Electricity under 7th
  2. What are AT&C losses?
  3. What is Power Grid?
  4. Energy availability per capita in India.
  5. What is UDAY scheme?

Mains Link:

Discuss the need for and significance of special measures announced by the government for the power sector in India.

Sources: the Hindu.