Context:
The Central Government is planning to introduce another scheme aimed at helping public sector power distribution utilities (discoms) reduce technical losses through “transition financing” for the necessary capital expenditure. Discoms, which are primarily owned and managed by State Governments, play a crucial role in the power supply and distribution network.
Relevance:
- GS2- Government Policies & Interventions
- GS3- Growth & Development
Mains Question:
What are the major concerns associated with the power sector in India? Also suggest a way forward strategy to enhance the efficiency of the power sector. (15 Marks, 250 Words).
Working of Discoms and Technical Losses:
- Discoms purchase electricity from public sector generating companies (gencos) like National Thermal Power Corporation (NTPC) and from private sector independent power producers (IPPs) to supply to consumers.
- Technical losses, more precisely referred to as aggregate technical and commercial (AT&C) losses, represent leakage from the system or power theft.
- According to Union Power Minister RK Singh, AT&C losses were previously as high as 27 percent. This means that out of every 100 units of electricity generated, 27 units are stolen and unpaid for, significantly impacting the discoms’ operations.
- To compensate for the revenue lost on these 27 stolen units, discoms could theoretically increase the price of the remaining 73 units.
- However, in practice, this is not feasible, leading to losses equivalent to the revenue from the stolen units. Additionally, there are other factors that worsen their financial situation.
Other Factors Straining the Discoms’ Finances:
- The Electricity Act (2003) and the Guidelines from the Ministry of Power require discoms to set electricity tariffs such that the average revenue realization (ARR) matches the average cost of supply (ACS), including purchase, transmission, and distribution.
- Despite this, State Government directives often lead to certain households being billed either nothing (for consumption up to 200/300 units a month in Delhi/Punjab) or receiving a flat subsidy (₹800 for consumption between 201 and 400 units a month in Delhi).
- Moreover, there is free electricity supply to farmers in Punjab, further straining the discoms’ finances.
- Discoms attempt to offset under-recoveries by increasing tariffs for industries and businesses, sometimes up to ₹16 per unit.
- This high cost is a significant factor in making Indian products and services less competitive both domestically and internationally.
- Although States promise to compensate for much of the under-recoveries, they often provide only partial reimbursements and do so after considerable delays, exacerbating discoms’ financial losses.
- The twin challenges of AT&C losses and under-recoveries from sales to households and farmers have persisted for nearly 25 years.
Central Government’s Financial Restructuring Packages:
- Since the early 2000s, the Central Government has introduced four financial restructuring packages (FRPs) to assist discoms.
- The first two packages (2002, 2012) mainly aimed at writing off their losses.
Ujwal DISCOM Assurance Yojana (UDAY)- The Third Package:
About:
- The third package, Ujwal DISCOM Assurance Yojana (UDAY), launched in November 2015, required discoms to meet specific milestones in exchange for financial aid.
- Under UDAY, discoms’ massive debt of approximately ₹400,000 crore was addressed. States took over 75 percent of this debt, and for the remaining amount, discoms were permitted to issue bonds at a concessional interest rate.
- In return, discoms were expected to reduce AT&C losses from 20.7 percent in 2015-16 to 15 percent by 2018-19 and to eliminate the ACS-ARR gap, which was ₹0.59 per unit in 2015-16, by 2018-19. However, discoms failed to meet these targets.
Progress Achieved:
- In 2019-20, their AT&C losses were 18.9 percent, missing the 15 percent target for 2018-19. The ACS-ARR gap was ₹0.42 per unit, against a target of zero for 2018-19. During 2020-21, the situation worsened, with AT&C losses rising to 22.3 percent and the ACS-ARR gap increasing to ₹0.69 per unit.
- Consequently, discoms’ losses, which had reduced from ₹52,000 crore in 2015-16 to ₹17,000 crore in 2017-18 due to the FRP, surged to about ₹30,000 crore in 2019-20 and further to ₹58,000 crore in 2020-21.
- As a result, their debt ballooned, reaching ₹620,000 crore by the end of FY 2021-22.
‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD)- The Fourth Package:
About:
- In response, the Central Government introduced a fourth package called the ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD), announced by Finance Minister Nirmala Sitharaman in the FY 2021-22 Budget.
- With an outlay of ₹300,000 crore, the scheme aims to reduce discoms’ AT&C losses to 12-15 percent and eliminate the ACS-ARR gap by March 2025.
- This goal is to be achieved by upgrading distribution infrastructure and building capacity to enhance the reliability and quality of power supply.
- The scheme includes a mandatory component for pre-paid and smart metering across the power supply chain, including approximately 220 million households.
- In addition to nearly ₹100,000 crore in gross budgetary support (GBS) from the Centre, the scheme involves funding from state-run sector-specific lenders such as the Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) under irrevocable State Government guarantees.
- The release of funds is contingent on discoms meeting pre-qualifying criteria and achieving basic reform benchmarks.
- The RLRBSD, launched in FY 2021-22, sets targets that were originally supposed to be met by 2018-19, now aiming for March 2025—a goal that some find laughable.
Progress Achieved:
- Regarding progress, the Power Ministry has identified 57 discoms from 32 States and Union Territories under the scheme and prepared detailed project reports (DPRs) for these.
- According to a statement by then Power Minister RK Singh in December 2023, DPRs totaling ₹120,000 crore have been approved for loss reduction works, and ₹130,000 crore for smart metering works.
- Beyond the paperwork, as of January 2024, PFC-REC has disbursed a total of ₹112,000 crore in loans to 16 States under the scheme, with the sanctioned amount standing at ₹133,000 crore.
- Regarding gross budgetary support, the Centre released only ₹6,000 crore in FY 2023-24, half of the ₹12,000 crore budget allocation.
- Progress has been slow; for instance, out of the sanctioned 220 million smart meters, only about 0.8 million have been installed so far.
- There is concern that discoms might be using the funds to repay earlier loans used to cover recurring losses, similar to what happened under UDAY.
- With the scheme set to end in about 10 months on March 31, 2025, the Government plans to launch a second version, RLRBSD-II, with a similar outlay of ₹300,000 crore.
- However, there’s a risk that these funds might also be used to manage the growing debt of discoms, perpetuating the cycle of financial distress.
Conclusion:
Apart from the above concerns what needs to be comprehended is that the root of the problem is political. To win elections, which occur frequently, almost every political party offers populist measures such as heavily subsidized or free power to farmers and poor households, and often overlooks power theft in slums that provide significant votes. They use discoms as tools to achieve these populist goals.
