New power play

The draft proposal may not address discom losses

A draft scheme by the power ministry represents the Narendra Modi government’s second attempt to tackle the chronic losses of state power distribution companies (discoms), via a Rs 3.12-trillion reform programme that involves cost-sharing between the Centre and the states and is linked to loss-reduction targets. This scheme differs from the 2015 Ujwal Discom Assurance Yojana (UDAY), which allowed the state governments to take over the liabilities of their discoms in return for meeting targets, such as reducing technical losses, expanding metering, and so on over five years (the states, in turn, issued bonds to fund this debt). The current scheme proposes that the Centre will bear 60 per cent (Rs 1.9 trillion) and the state 40 per cent of the cost of all programmes to strengthen the power distribution system. For the Centre, the financing will take the form of grants that will also cover the two signature distribution reform schemes, the Deendayal Upadhyay Gram Jyoti Yojana (DDUGJY) and the Integrated Power Development Scheme (IPDS), which were launched in 2015 to improve rural and urban electricity infrastructure, respectively. 

It is difficult to see how the latest scheme, which is being scrutinised by an inter-ministerial group, can succeed where the high-profile UDAY did not. The new scheme proposes to release grants under the DDUGJY and IPDS, the funds for which have already been sanctioned, in proportion to the discoms achieving mutually agreed efficiency targets — a reduction in AT&C (aggregate technical and commercial) losses (a rubric that covers everything from power theft to the provision of mandated subsidised power) to 15 per cent and bringing the ratio of the average cost of supply and revenue realisation (ACS-ARR) to one —both to be achieved by 2024-25. But none of these targets was met under the UDAY scheme. For instance, AT&C losses under UDAY were to be brought down to 15 per cent (from 26 per cent in 2015) and the ACS-ARR ratio to one by 2020, the final year of the scheme. Today, AT&C losses stand at 23.9 per cent and the ACS-ARR ratio at 0.53. The cumulative losses of discoms in FY20 of Rs 18,000 crore remain a potent pointer to the failure to achieve meaningful efficiencies.

Several state governments opted to raise the level of cross-subsidies instead by raising tariffs for industrial users to cover the subsidies to other politically sensitive groups such as farmers. Meanwhile, state debt has increased significantly over the past five years with discoms accounting for a good chunk of the indebtedness. Given the financial pressure on states as a result of the Covid-19-induced contraction and their reluctance to access the markets further, it is unclear how they will be able to finance further discom infrastructure. The power ministry has argued that the savings accruing from operational efficiencies will partly pay for the cost of expanding and improving power infrastructure. But this reasoning ignores the inherent weakness in the power sector and that is the state governments’ visceral reluctance to bite the political bullet of reducing electricity subsidies to such selected groups. It is worth noting that several states continue to protest against similar proposals from the power ministry asking discoms to end electricity subsidies and introduce private franchisees. This latest proposal, therefore, could well meet a similar fate.