Niti Aayog pitches for greater financial autonomy for state-owned discoms

In rural areas, private investors might not find it attractive to become licensees, but a franchisee model might be attractive, says the govt think tank

Government think tank Niti Aayog has pitched for greater operational and financial autonomy for state-owned discoms, saying for a state-owned utility to succeed, there should be a clear separation between utility and state.

In a report titled 'Turning Around the Power Distribution Sector', Niti Aayog said the performance of state-owned discoms is also determined by the ability of the respective State Electricity Regulatory Commissions (SERC) to revise tariff frequently and adequately.

"...For a state-owned utility to succeed, there should be a clear separation between utility and state. The utility should have operational and financial autonomy. Good corporate governance practices, including the use of independent directors, can help ensure such separation," it suggested.

 

It pointed out that there can be a variety of distribution franchisees, from models that are essentially outsourcing revenue collection to taking care of all distribution functions in a defined area.

"In rural areas, private investors might not find it attractive to become licensees, but a franchisee model might be attractive," it said.

Noting that discoms have a monopoly in their area of functioning, the think tank suggested that delicensing distribution can introduce competition and enable retail choice for customers.

"This reform can be challenging and should be accompanied with careful market design.

"The feasibility of competition will depend on the size of the market, the nature of the demand, the efficiency of the incumbent and potential for growth," the report noted.

Niti Aayog observed that public private partnership (PPP) models can be useful in loss-making areas, where commercial operation might not be feasible without support in the form of Viability Gap Funding (VGF) from the government.

Niti Aayog, however, pointed out that even though now India has achieved universal access to electricity, power distribution continues to be the weakest link in the supply chain of the power sector.

"Most distribution utilities are making major losses as a consequence of expensive long-term power purchase agreements, poor infrastructure, and inefficient operations, among others.

"These losses, in turn, prevent them from making the investments required to improve the quality of the power supply and to prepare for the wider penetration of renewable energy," it said.

According to Niti Aayog, the distribution utilities' inability to pay power generators endangers the financial health of the generators and their lenders, causing a negative domino effect on the economy.

The government think tank suggested that discoms should optimise their power purchase by procuring from the markets as suitable, and they should be rewarded for efficiency gains from the use of the market.

Elaborating further, Niti Aayog said most power distribution companies (or discoms) incur losses every yearthe total loss is estimated to be Rs 90,000 crore in FY 2021. "Due to these accumulated losses, discoms are unable to pay for generators on time as of March 2021 an amount of Rs 67,917 crore was overdue," it said.

Niti Aayog also pointed out that many states provide subsidised and sometimes free electricity for agriculture.

"This can lead to leakages and high losses for discoms," it said, adding that some states, with large agricultural consumer bases such as Rajasthan, Andhra Pradesh, Gujarat, Karnataka, and Maharashtra, have reduced leakages by separating feeders for agricultural use from non-agricultural use.

It also suggested that discoms can significantly decrease their power procurement costs by encouraging the use of solar pumps for agriculture.

It observed that discoms have locked themselves into long-term, expensive power purchase agreements (PPAs).

"As long as the markets continue to provide low-cost power, discoms should not sign new expensive long-term thermal PPA," it opined.

According to the government think tank, discoms should use time of day (ToD) tariffs to incentivise changes in demand patterns.

"Dynamic tariffs, enabled by advanced metering and a smart grid, can reduce the discoms' power purchase costs and help manage peak loads," it said.

Releasing the report, Niti Aayog Vice Chairman Rajiv Kumar said a healthy and efficient distribution sector is essential for improving the ease of doing business, and for improving ease of life.

The report is co-authored by Niti Aayog, RMI and RMI India.

According to an official statement, Niti Aayog member V K Saraswat said that this report presents policymakers with a menu of reform options to put the distribution sector on the track of efficiency and profitability.

Most power distribution companies (discoms) in India incur losses every year- total losses are estimated to be as high as Rs 90,000 crore in FY2021, as per the statement.

Due to these accumulated losses, discoms are unable to pay generators on time, make investments required to ensure high-quality power, or prepare for greater use of variable renewable energy, it added.

Highlighting the need for addressing current challenges, Clay Stranger, Managing Director, RMI said, "A robust and long-lasting solution to the woes of the discoms requires changes in policy as well as organisational, managerial, and technological reforms.

"Different states have travelled along different pathways of reforms, giving a rich set of policy experiments to learn from," Stranger noted.