The DISCOM is dying, long live the DISCOM

At the end of FY16, the total outstanding debt of DISCOMs stood at Rs 4,146 billion and annual losses stood at Rs 657 billion

The DISCOM is dying, at least as we know it. World over, disruptions in technology, regulations, and business models are forcing traditional power distribution companies to take stock of what the future portends for them. In India, the outlook is further complicated by other development imperatives — a push for Power for All, a desire to Make in India, and an ambition to speed up and scale up the deployment of renewable energy. Will centralised power distribution deliver quality and affordable electricity to everyone? Is our electricity pricing conducive to industrial growth? Is the distribution-grid ready to absorb a greater share of renewable electricity? The answers to these questions range between “no” and “may be”, depending on how we interpret the current malaise affecting DISCOMs in India, and how we fix them — technically and politically. 

That many DISCOMs are in poor financial health is not news. At the end of FY16, the total outstanding debt stood at Rs 4,146 billion and annual losses stood at Rs 657 billion. The current levels of losses and debt, can be explained by various pathologies of the system. But two challenges, in particular, demonstrate how short-term measures will not suffice to hold off the long-term collapse. 

First, 75-80 per cent of a DISCOM’s costs are in power purchase and many are locked into expensive agreements (PPAs) for decades. Improper planning, and technical constraints in operating these plants and the grid, mean that Rs 200 billion is left on the table, annually, as a result of these PPAs.

Secondly, DISCOMs charge their commercial and industrial (C&I) consumers very high tariffs to compensate for politically determined low or no tariffs to a large, unmetered residential and agricultural consumer base. High tariffs combined with unreliable supply have rendered Indian industry uncompetitive in global markets. Traditionally, industry built captive power plants skirt the problem. Captive electricity generated by industries was nearly 17 per cent of all DISCOM sales in FY17. 

Today, C&I consumers have new options, which include distributed generation of renewable energy. Many large companies have started installing kilo/mega watt scale solar systems in their factory premises. By charging exorbitant tariffs and providing poor quality power, DISCOMs will eventually drive away their best paying consumers. The three ongoing disruptions — Make in India, Power for All, and renewables-based electricity — make life even harder for DISCOMs. Yet, they afford an opportunity to rethink business models and reorient towards a more sustainable future. 

Make in India, as conceived, has a focus on high value-add sectors such as electronics and ICT, aerospace, and defence manufacturing. These call for higher electricity-intensity and improved reliability for units engaged in this sector. At the other end of the manufacturing spectrum, more than 65 per cent, of the 17 million MSME units, rely only on electricity as an input for all their energy needs. The flailing electricity demand in the economy can get a much-needed fillip if industrial production gets a boost. A rationalised tariff structure would help to retain existing consumers and draw in new market entrants. 

Power for All is contingent on many factors. These range from the engineering and execution challenges of electrifying 3.3 million household per month, to ensuring that reliable and regular power is supplied, to metering and billing the consumption at the household end. For DISCOMs, rather than the joy of gaining millions of new consumers, the fear is that they would be saddled with millions of subsidised consumers, further increasing their losses. Agricultural and residential consumers together account for 50 per cent of the sales volume but only 30 per cent of the revenue. Yet, there is a willingness to pay for good quality power. When the Council on Energy, Environment and Water (CEEW) and Columbia University conducted the ACCESS survey, the largest of its kind energy access survey in India, 44 per cent of rural respondents said they were unable to use all the appliances of their choice on account of poor quality of supply. To cater to this aspiring group of consumers, DISCOMs have to reduce power procurement costs. New renewable energy projects offer this hope. However, only a pan-India overhaul of the current PPAs and some astute financial engineering can deliver a more reliable and low-cost generation mix. By reducing costs and increasing revenue, DISCOMs and Power for All could become allies in a transformed electricity market. 

Renewable energy is important for India’s battle against climate change, local air pollution, and its energy security. In this, roof-top and distributed generators have a special role, but DISCOMs fear the loss of revenue to this emerging prosumer class. There is, consequently, a reflexive resistance. DISCOMs have to experiment with new business models that co-opt all consumers into the renewable energy transition – those with or without, roof-space, financing or an innate preference for clean energy. Combined with advanced metering, and novel load management techniques, and tapping into new business opportunities like electric vehicles charging, DISCOMs can ride these new waves. CEEW is working with a utility in New Delhi in identifying opportunities from these new developments. 

The answers are not yet clear but they indicate that disruption in the market need not mean the end of the line for the beleaguered DISCOM. The traditional DISCOM might be dead or dying. But a reformed, rational, and responsive DISCOM could get a new lease of life.

Ghosh is CEO and Ganesan is Research Fellow at the Council on Energy, Environment and Water (http://ceew.in). 

Twitter: @GhoshArunabha; @CEEWIndia