Context: 2024 has been seminal for the power sector with the country meeting an unprecedented peak demand of 250 GW in a year. India also added around 30 GW of installed capacity in the last 12 months, three-fourths of which came from renewable energy (RE). However, debt sustainability of DISCOMs is the biggest challenge faced by the power sector.
Relevance of the Topic: Mains: Challenges faced by DISCOMs & Way Forward.
Background:
- The International Energy Agency (IEA) expects India’s power demand to grow at 4% annually till 2050. A robust power sector rests on a vibrant DISCOM ecosystem.
- Distribution Companies (DISCOMs) act as the link between power producers and consumers, ensuring electricity distribution across the nation.
Challenges faced by the DISCOMs
- Higher AT&C losses (22%) on the account of transmission losses, commercial losses due to power theft, absence of metering, inefficiencies in bill collection. Global Average for AT&C losses is much lower at 8%.
- Higher Cost of Power Procurement: Power procurement accounts for about 70% of costs incurred by DISCOMs. DISCOMs have entered into expensive and long-term thermal Power Purchase Agreements (PPAs). Also, delays and cost overruns in some projects have increased capital costs.
- Debt Unsustainability: The outstanding debt of Discoms stands at ₹7.14 lakh crore as of March 2023 and is likely to increase, as Discoms continue to grapple with ACS-ARR gap (The gap between Average Cost of Supply and the Average Revenue Realised).
- Lack of Autonomy: Political interference in fixing tariffs leading to lower tariffs on electricity. DISCOMS end up supplying electricity to households and the agriculture sector at subsidised prices leading to higher losses.
- Higher dependence on State Governments: DISCOMs depend on state governments for subsidies. Delays in receiving subsidy reimbursements from the government add to liquidity stresses of DISCOMs.
- Monopolisation: Presently, DISCOMs enjoy monopoly in distribution of electricity leading to absence of competition, higher inefficiencies and poor service-delivery.
- Slow pace of Transmission Infrastructure: Of the 1,14,687 circuit km of (ckm) transmission lines and 776 GVA (Gigavolt-Ampere) substations to be added between April 2022-March 2027, just 28% and 20%, respectively, have been commissioned as of October 2024.
Distribution Sector Reforms
- UDAY Scheme: Aims at improving the financial position of DISCOMs. Under the scheme, states are supposed to take over 75% of the discoms’ debt and the DISCOMs were required to reduce AT&C losses to 15%.
- Revamped Distribution Sector Scheme (RDSS):
- RDSS has an outlay of Rs 3,03,758 crores over five years (2021-22 to 2025-26), with an estimated government budgetary support (GBS) of Rs 976.31 billion.
- Aim: To reduce AT&C losses on a pan-India level to 12-15% by 2024-25; reduce the average cost of supply-average revenue realised gap on a pan-India level to zero by 2024-25; and improve the quality, reliability and affordability of power supply to end-consumers.
- RDSS focuses on providing financial support for smart metering systems, distribution infrastructure upgrades, training, capacity building etc.
- Financial Support: A total of Rs. 1.4 lakh crores was provided to DISCOMs in 2022–23 by the central and state agencies.
- Private Participation and Competition in Distribution: Some of the states have promoted private participation in the DISCOMs through (a) Franchise Model and (b) Privatisation of DISCOMs.
- Under the Franchise model, the private entity has no ownership over the distribution grid assets. The private party manages billing and revenue collection. Example: Bhiwandi, Maharashtra.
- In case of privatisation, the private entity not only manages the billing and revenue collection but also owns the distribution grid. Example: Privatisation of Delhi Vidyut Board in 2002.
Way Forward
- Tariff Reform and Direct Subsidy Transfer: Restructuring tariffs to reflect true cost of electricity generation and distribution is essential to ensure financial viability for DISCOMs. Direct transfer of tariff subsidies to beneficiaries may reduce undue financial burden on DISCOMs.
- Autonomous Regulatory Bodies: Ensuring independence of regulatory bodies is crucial for effective tariff-regulation. Regulatory bodies should have authority to set tariffs based on actual costs and demand to encourage DISCOMs to operate efficiently.
- Private Participation: Introducing competition among DISCOMs by allowing multiple-players to operate in a region can improve efficiency and bring in much-needed investment, innovation and management expertise.
- Smart grid and metering can enable real-time monitoring of electricity usage, efficient load management, thereby, reducing transmission and distribution losses. It would also help in Peer-to-Peer energy trading and help utilities and consumers in efficient power utilisation.
- Flexible PPAs: Electricity Regulatory Commissions should allow DISCOMs to make flexible, cost-effective procurement instead of continued lock-in under rigid and longer PPAs.
Hence, addressing the challenges faced by DISCOMs is imperative to ensure sustainability and efficiency of India's power distribution system.