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Insights into Editorial: Why the govt had to inject money into the power sector

discom

Introduction:

The nationwide lockdown has resulted in peak electricity demand coming down, with commercial and industrial power demand taking a hit after many factories shut down.

However, household consumption, which accounts for around a quarter of India’s power demand, has gone up.

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

Context:

Part of the package announced by Finance Minister was a Rs 90,000-crore liquidity injection into power distribution companies (or DISCOMS).

The move is aimed at helping the DISCOMS clear their dues with GENCOS (or electricity generation companies), who in turn can clear their outstanding dues with suppliers, such as coal miners, easing some of the working capital woes of Coal India Ltd and contract miners.

This is subject to the condition that the Centre will act as guarantor for loans given by the state-owned power finance companies such as PFC and REC Ltd to the DISCOMS.

Economic stimulus: Rs.90,000 crore liquidity injection for fund-starved DISCOMS:

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

This was announced as one of the 15 measures in the first tranche to combat the economic disruption from the coronavirus lockdown, that has worsened the already precarious finances of power DISCOMS.

DISCOMS today are facing unprecedented cash flow problems. This Rs.90,000 crore will help in clearing the outstanding dues of DISCOMS by state owned financial institutions.

Why was this needed?

The primary trigger is the poor financial condition and revenue collection abilities of most state DISCOMS.

This is despite several interventions, including a scheme called UDAY that was launched in 2015 to fix the problems of a sector where the upstream side (electricity generation) was drawing investments even as the downstream (distribution) side was leaking like a sieve.

To understand how the Electricity sector works, we have to imagine a three-stage process:

First stage:

Electricity is generated at thermal, hydro or renewable energy power plants, which are operated by either state-owned companies such as NTPC Ltd, NHPC Ltd, or private companies (also called Independent power producers or IPPs) such as Tata Power, Adani Power, or renewable companies such as ReNew Power or Greenko.

Second stage:

  1. 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.
  2. The transmission segment is dominated largely by state-owned companies such as Powergrid Corp, which operate the grid.
  3. Similarly, each state has a State Transmission Utility (STU) along with private transmission companies which are responsible for setting up intra-state transmission projects.
  4. Companies like Power System Operation Corporation (POSOCO) along with National, Regional and State Dispatch Centres (NLDC, RLDC, SLDC) work in tandem to ensure grid security and balance.
  5. The entire electricity grid consists of hundreds of thousands of miles of high-voltage power lines and millions of miles of low-voltage power lines with distribution transformers that connect thousands of power plants to millions of electricity customers all across the country.
  6. Third stage: This last mile link is where DISCOMS come in, operated largely by state governments.
  7. However, in cities such as Delhi, Mumbai, Ahmedabad, and Kolkata, private entities own the entire distribution business or parts of it.

Why there is a problem?

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

The key issue with the power sector currently is the continuing problem of the poor financial situation of state DISCOMS.

This has been affecting their ability to buy power for supply, and the ability to invest in improving the distribution infrastructure. Consequently, this impacts the quality of electricity that consumers receive.

 

Effectiveness of the DISCOMS:

Power Distribution Companies (DISCOMS) responsible for the supply and distribution of energy to the consumers (industry, commercial, agriculture, domestic etc.).

This sector is the weakest link in terms of financial and operational sustainability.

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

Due to the perennial cash collection shortfall, often due to payment delays from consumers, DISCOMS are unable to make timely payments for their energy purchases from the generators. This gap/shortfall is met by borrowings (debt), government subsidies, and possibly, through reduced expenditure.

This increases the DISCOMS cost of borrowing (interest), which is inevitably borne by the consumer.

There are two fundamental problems here:

  1. One, in India, electricity price for certain segments such as agriculture and the domestic category (what we use in our homes) is cross-subsidised by the industries (factories) and the commercial sector (shops, malls).
    1. This affects the competitiveness of industry. While the government has started a process through which the extent of cross-subsidisation is gradually being reduced, this is easier said than done as states do not like to increase tariffs for politically sensitive constituents, such as farmers.
    2. So, industry continues to cross-subsidise these categories.
  2. Second, there is 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 DISCOMS gets from the generating company, the bills that it raises and the final realisation from the collection process from end-consumers such as you and me.

Conclusion:

While there are regulatory bodies such as the Regulatory Commissions of the state (SERCs), which are largely responsible for ensuring that tariff revisions happen regularly and a DISCOMS recovers the money for the electricity that it supplies to each customer, this has not been that successful on the ground.

As a result, the DISCOMS are perennially short of funds, even to pay those supplying power to them, resulting in a cascading impact up the value chain.

DISCOMS must therefore, buy cost-efficient power for consumers, ensure supply reliability with quality by minimising losses/leakages, accurately meter, bill, and collect payments from the consumers, and thereby, enable timely payments to the generators.

Measures for improving viability of distribution companies, including tariff rationalization and timely release of subsidies along with improved governance were also discussed.

 


Insights Current Affairs Analysis (ICAN) by IAS Topper