Industry
In charts: Discoms stuck between rock and a hard place
Summary
With the debt-to-GSDP ratios of some state governments above the 30% threshold, the outstanding dues of power distribution companies remain a significant burden. With India’s power needs growing quickly, the issue is as urgent as everWith demand for electricity growing rapidly, the need to resolve long-standing issues of India’s power sector is becoming ever more urgent. The huge debts of power distribution companies (discoms) continue to threaten states’ financial health. According to the Centre’s PRAAPTI portal, state-run discoms owed a staggering ₹87,059 crore to power generating companies (gencos) as of 9 October, of which 36% was past its due date.
Power distribution companies in India are mainly owned by state governments, with private firms limited to a few states. Many states provide subsidies, artificially depressing tariffs for the farm sector and a section of households. They also bail out discoms from time to time, making the sector a financial burden, both in terms of subsidies and contingent liabilities, as noted by a June 2022 report by the Reserve Bank of India (RBI).
Several reforms, including the now-discontinued Ujjwal Discom Assurance Yojana (UDAY), have aimed to restructure their debt and instil financial discipline. Last year the union government allowed repayments to gencos in easy monthly instalments (EMIs) and announced a scheme to cut losses through upgraded infrastructure and “smart meters". The EMI facility has helped reduce dues to gencos sharply since crossing ₹1 trillion in mid-May.
However, latest available data shows discoms’ total borrowing was as high as ₹6.2 trillion in March 2022, up 6% in a year, suggesting states’ debt burden is still high. Discoms in Maharashtra, Uttar Pradesh, Tamil Nadu and Gujarat have the highest amounts overdue to gencos. Some of these states are also highly indebted, with debt surpassing 30% of their gross state domestic product (GSDP).
Burden of guarantee
Since the power sector is largely state-owned, governments must inject capital through equity and debt to keep discoms afloat and ensure proper supply of electricity. According to a December 2020 report by PRS Legislative Research, over 60% of the total outstanding loan guarantees given by state governments are for power sector companies. (These guarantees are contingent liabilities of the states, which will have to honour them in case a discom defaults.)
Under UDAY, 15 state governments took over 75% of the outstanding debt of state-owned discoms (about ₹2.1 trillion) between 2015-16 and 2016-17. The scheme wanted these states to fund a portion of losses of discoms until 2019-20. With UDAY bailouts, the guarantees provided by Andhra Pradesh went up from 4.6% in 2017-18 of GSDP to 9% in 2020-21, and Rajasthan’s from 7.5% to 8.6%. Even in Bihar, where it was 1.1%, it went up to 3.4%, RBI data showed.
Rising costs
The deterioration of discoms' financial health could be attributed to several key factors, including substantial technical and commercial losses, elevated power procurement expenses, the imposition of cross-subsidy burdens on tariffs by state authorities, and a range of operational inefficiencies.
A drilldown into the cost structure of selected discoms shows that a substantial 70-80% of their expenditures are attributed to power purchase, according to the latest Annual Integrated Rating and Ranking of Power Distribution Utilities report by the power ministry. Additionally, discoms find themselves ensnared in suboptimal procurement contracts, often manifested as long-term power purchase agreements (PPAs). These long-term PPAs often lack clearly-defined exit clauses.
While various factors significantly influence the cost of electricity generation, volatility in energy commodity prices could be the most prominent moving forward. Australia is one of the major coal exporters to India and prices there are expected to remain elevated despite some moderation from their 2022 highs. It's a similar case for Brent crude oil.
The way forward?
The 15th Finance Commission’s stress on states maintaining strict fiscal discipline has landed them and discoms in a tight spot. To qualify for an additional borrowing space of 0.5% of GSDP, states must commit to gradually absorbing their discoms’ losses. As of 26 April the union government, under the National Electricity Fund, released ₹2,396 crore to subsidize interest on loans raised by discoms.
The Institute of Energy Economics and Financial Analysis (IEEFA) recently noted that states must be directly responsible and accountable for improving the financial mess in the power distribution sector. To address the unending financial woes of state-run discoms, IEEFA suggested a slew of remedies, including doing away with legacy contracts such as long-term PPAs, massive cuts in cross-subsidies, and reducing losses through digitalization. But, more importantly, political will is required to break the market monopoly and improve the performance of state-run discoms.
The author is an independent financial writer and data analyst.
