High discom debt, losses hinder prospects of listing state power firms

As discoms pushed all the buttons to meet the record-high demand during FY23, their total debt rose to Rs 70k cr for funding their capex, working capital requirement, and operational losses

Last week, at a conference of state power ministers in New Delhi, Union Power Minister M L Khattar urged them to publicly list their profit-making power sector entities. “Those states which have good performing generating or transmission companies (gencos or transcos) and even power distribution companies (discoms) should consider listing them on exchanges,” Khattar said.

 

But he juxtapositioned it with the worry­ing statistics of state-owned discoms. “The current cumulative debt of discoms is Rs 6.84 trillion, and the accumulated losses stand at Rs 6.46 trillion as of now,” the minister said.

 

During 2023-24 (FY24), the cost of power procurement for state-owned discoms increased by 71 paise, according to government data submitted in Parliament. Various reasons have been cited for it — such as imported coal, increased cost of power transmission, and record-high demand.

 

As discoms pushed all the buttons to meet the record-high demand during FY23, their total debt rose to Rs 70,000 crore for funding their capital expenditure, working capital requirement, and operational losses, according to the Annual Integrated Ranking and Rating report of the PFC earlier this year.  The report said 16 states had seen their financial losses increase significantly during FY23 (see chart). These include large states such as Uttar Pradesh, Telangana, Maharashtra, Punjab, and Jharkhand.

 

The debt-loss vortex of discoms could stand to threaten the idea of financing them through public money. 

 

Girishkumar Kadam, senior vice president and group head - corporate ratings, ICRA says the increase in power purchase cost for FY23 remained higher than approved in the tariff orders. “This was driven by increased dependence on imported coal amid elevated global coal prices and a rise in tariffs in the short-term market. This in turn led to higher losses for discoms in FY23. While coal prices have moderated from the peak in FY23, short-term tariffs remain elevated, maintaining upward pressure on PPC,” Kadam says.

 

However, the revenue of these states went up by close to 35 per cent between FY21 and FY23. But experts say revenue growth is momentary, and a larger problem still exis­ts. Most of the debt is being utilised as worki­ng capital, according to the PFC report.

 

ICRA’s analysis says the gross debt for state-owned discoms at the all-India level increased owing to the debt availed under the liquidity support and LPS schemes approved by the government of India, along with the additional debt taken to fund working capital and capital expenditure. This is estimated to have increased to Rs 7.0 trillion as of March 2024 with additional debt drawn under the LPS scheme as well as credit facilities availed to ensure timely payments to power generators.

 

Tariff issue

 

Kadam points out that the performance of discoms remains constrained by inadequate tariffs relative to the cost of supply, higher-than-regulator-approved aggregate technical and commercial (AT&C) losses, and a considerable debt burden. “Further, delays in receiving payments from state government departments for power supply constrain discom finances. Except for discoms in Gujarat, most state-owned discoms remain loss-making,” he says.

 

According to ICRA, tariff hikes by state electricity regulators remain modest with a median rise of 1.7 per cent for FY25, lower than the 2.5 per cent approved for FY24. This is not in line with the rise in cost struct­ure, mainly power purchase cost. The media­­n five-year compound annual growth rate for power purchase cost was above 5 per cent for the period leading up to FY23, whereas the increase in tariffs has been lower.

 

According to recent data released by Khattar, AT&C losses, which indicate operational losses, increased to 17 per cent during FY24, compared to 15 per cent the previous year. The ACS-ARR gap has improved to Rs 0.21 per kWh in FY24, as per provisional accounts, from Rs 0.45 per kilow­att-hour (kWh) in FY23. This gap indicates the difference between the cost of purchas­ing power and the cost of power supply or the financial losses. Khattar told the states the goal was to bring it down to zero.

 

In 2023, state-owned discoms mooted the idea of asset monetisation to generate working capital for infrastructure growth. The idea was backed by several state power departments and discoms and a committee was formed by the Union power ministry for “debt sustainability of discoms”.

 

“The interest on our borrowing is generally taken care of by the tariff. However, dealing with the principal amount is a cause of concern for discoms. We are considering several such options to shift the burden from discoms. One such option was the Ujwal DISCOM Assurance Yojana (UDAY) scheme, but then the finances of the state governments may come under pressure. Hence, Invits are under consideration,” says a source aware of the development.

 

Debt reconstruction

 

UDAY was the fourth debt reconstruction scheme for discoms floated by the Centre and the first discom reform by the National Democratic Alliance government. It was aimed at cleaning their accumulated financial and operational losses. The scheme allowed state governments to take over the losses of their discoms and issue bonds. While this helped clear the legacy loss and debt, losses have increased since the scheme concluded in FY20.

 

The latest discoms reforms scheme,  Revamped Distribution Sector Scheme (RDSS), has a different approach of tying the budgetary grant of the Central government-backed power infrastructure schemes with the operational and financial performance of discoms. It does not have any debt recycling portion.

 

The scheme aims at meeting operational targets which would be linked to disbursement of Central funds for programmes under the scheme. This includes smart metering, transmission and distribution infrastructure upgrade, induction of tech-based solutions, etc.

 

However, as state discoms face a debt-loss cycle yet again, these programmes are also in limbo. This hurts the investment potential in the power sector that these states offer.

 

Khattar last week said: “Discoms contin­ue to struggle with financial viability, so states should improve their prospects and rankings before considering their listing.”

 

The ball is now in the states’ court. Under UDAY, states took over the loans of discoms. What will they do now?