Tariff hikes, lower costs to cut discom losses to ₹8,000-10,000 crore

CRISIL Ratings expects operating losses of state-owned power discoms to drop to Rs 8,000-10,000 crore in FY25, helped by tariff hikes, lower purchase costs and improved efficiency

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The operating losses of 30 state-owned power distribution companies (discoms) are expected to drop by a third in the ongoing financial year, on the back of tariff hikes in a few states, reduced power purchase costs and improved operational efficiency.

 

The operating losses -- which is the gap between average cost of supply (ACS) and average revenue realised (ARR) per unit of power-- is likely to come down to a range between ₹8,000 crore and ₹10,000 crore from ₹12,000 crore and ₹15,000 crore losses that the discoms reported in the last financial year.

 

“Narrowing operating losses have slowed the pace of debt addition for discoms, leading to improvement in credit metrics,” CRISIL Ratings said in a report that analysed 30 discoms across 11 states which together meet 70 per cent of India’s power demand.

 

However, the dependence of discoms on state subsidies continues with a high overall debt burden.

 

Further improvement in ARR will be required to reach a higher level of cash accruals to service debt. They also remain exposed to risks emanating from the increased open access adoption by commercial and industrial users for sourcing renewable energy. 

 

The efficiency improvement is reflected in the reduction of aggregate technical and commercial (AT&C) losses

 

to 15 per cent last financial year from 19 per cent in 2019-20. This follows continued investments in infrastructure upgradation, including replacement of conductors and transformers, feeder segregation and underground cabling which minimises theft and unmetered sales.

 

“For this financial year, the operating gap is expected to narrow to 5-10 paise from 12 paise last financial year

 

and well below the 60 paise in 2020. The improvement will be driven by approved tariff hikes and the removal

 

of compensation cess on coal as part of goods and services tax (GST) rationalisation, which will bring down the average power purchase cost (APPC) by 4-6 paise per unit,” said Manish Gupta, deputy chief ratings officer, Crisil Ratings.

 

The operating gap of discoms has narrowed over the past five years driven by 110 paise per unit increase in

 

ARR on account of higher subsidy realisation and the adoption of fuel and power purchase price adjustment mechanism.

 

The average cost of supply has risen slower, by 65 paise per unit because of improvement in operational efficiency, as reflected in lower AT&C losses, and increased integration of relatively economical renewable energy.

 

Despite this, the discoms remain dependent on state governments to sustain their operations, with subsidy realisation expected at ₹2.3 trillion this financial year, more than double that in 2019-20. 

 

While the debt of the 30 state discoms will increase to ₹6.7 - ₹6.8 trillion this financial year from ₹6.5 trillion last financial year and ₹4 trillion in 2019-20, their interest coverage will improve to 1.3 times from 1.2 times last financial year and 0.2 times in 2019-20.