There has also been a build-up in dues to power generators by 30% to Rs1.27 trillion as of December 2020 on a year-on-year basis
The credit profiles of state-owned power distribution companies (discoms) continue to remain stressed due to higher level of aggregate technical and commercial (AT&C) losses compared with regulatory norms, inadequate tariffs in relation to their cost of supply, and inadequate subsidy support from the respective state governments, a new report by credit rating agency Icra has said. As a result, debt levels of discoms have again gone up post the implementation of UDAY (Ujwal Discom Assurance Yojana) by government of India in FY2016 and are now estimated at close to Rs6 trillion in FY22.
This apart, there has been a build-up in dues to power generators by 30% to Rs1.27 trillion as of December 2020 on a year-on-year (y-o-y) basis.
The agency said it maintains a negative outlook on state-run power distribution segment, while those in the private sector remain healthy, supported by superior operating efficiencies, favourable demographic profile and timely pass-through of cost variations to consumers.
“Such high level of liabilities (debt plus dues to generation companies) is unsustainable for discoms and, in turn, for the growth of the power sector as such," Sabyasachi Majumdar, group head and senior vice president-corporate ratings, Icra, said. “The implementation of reforms in the distribution segment is essential, which could either be through privatization or through delicensing as proposed by the government of India. Further, delicensing would require suitable amendments to the Electricity Act as well as requisite policy and regulatory clarity with regard to the division of wires and supply business and tariff determination process for the incumbent and new licensees."
The recent announcement of a revamped, reforms-based, result-oriented scheme in Budget 2021 with an outlay of over Rs3 trillion to be spent over five years is directionally positive with the intent to improve the viability of state-owned discoms. A major part of this outlay is expected to be towards smart meters and upgrading distribution infrastructure. State-owned discoms could thus look at multiple measures to achieve a reduction in book loss levels through improvement in distribution loss levels by use of smart meters, use of distributed solar projects for supply of power to agriculture consumers and graded tariff hikes without any tariff shock to consumers.
“A 1% reduction in distribution losses would thus lead to savings and hence reduction in book losses by Rs50 billion per annum on all-India basis, on a marginal cost basis," Girishkumar Kadam, co-group head and vice president, Icra Ratings, said. “Further, use of distributed solar power projects for supply to agriculture consumers through dedicated agriculture feeder route is estimated to entail significant savings (estimated at Rs1.4 billion per gigawatt-hour of agriculture load met through solar) to discoms through reduction in power purchase cost and lower distribution losses, given the highly subsidized nature of power tariffs to agriculture consumers. Apart from the improvement in operating efficiency, timely tariff determination process, including true-up and implementation of fuel and power purchase cost adjustment framework, remains critical for discoms to ensure cost reflective tariffs."