Power fluctuations

Discoms are doing better but red lights still flash

The Power Finance Corporation’s latest Annual Integrated Ranking and Rating Report, the 11th in the series covering 71 power distribution companies (discoms), offers a relatively bright picture of the power sector in FY22, but the old problem of debt still darkens the outlook. On the positive side, FY22 saw a significant narrowing of the gap between the cost of supply per unit of power and the average revenue realised from 79 paise per unit of energy in FY20 to just 40 paise. The aggregate technical and commercial losses also fell to 16.5 per cent in FY22 from 21.5 per cent in FY21, reflecting an improvement in billing and collection efficiency, the bane of the Indian power sector.

This improved figure is, however, still no mean distance from the target of 12-15 per cent by 2024-25 set by the latest Revamped Distribution Sector Scheme, which links the operational and financial performance of discoms to fund disbursing centrally-sponsored schemes. At the same time, discoms’ overall losses before tax dropped from Rs 50,281 crore in FY21 to Rs 28,700 crore in FY22, but this was mainly on account of higher subsidies paid by the state with lower lags, and the fact that the government took over loans in FY20-22, thereby converting them into equity, which eased discoms’ debt obligations a tad. All this points to some flickers of improvement in a sector that suffers chronic operational inefficiencies on account of political interference. Much of that remains intact, however, as is clear from the fact that regulatory assets, which reflect the difference between the purchase cost and revenue generated from power sales, have been stagnant over FY20-22 at Rs 1.6 trillion. This, as the report pointed out, highlights the need for greater effort to clear dues through tariff increases and improvements in operational efficiency.

It is possible, however, that this outlook is slowly changing: The report said 65 out of 71 utilities published revised tariff schemes for FY23 as against 58 in FY22. Looking ahead, however, the key concern remains the levels of debt and falling investment, just as power demand is likely to surge. Debt rose to Rs 6.2 trillion from Rs 5.8 trillion. Though the report acknowledged that the pace of debt addition had slowed considerably over FY20-22 and that the debt service coverage ratio, which indicates the cash flow available to pay current debt obligations, had turned positive, the fact is that discoms’ current liabilities exceeded their overall current assets, and amounted to nearly twice the value of their current liquid assets. The sector’s liquidity gap stands at Rs 3.03 trillion, said the report, adding that the combined liquid assets of discoms are adequate to cover only their generation, transmission, and operational liabilities.

Some lender obligations could be covered by non-liquid assets, the report pointed out, but others would require liquidating non-current assets or marshalling external support. Worse, capex additions dropped sharply from Rs 59,000 crore to Rs 48,000 crore and the additional working capital requirements have dropped to just Rs 19,000 crore in FY22 from Rs 55,000 crore in FY21, pointing to lower spending on basic operational efficiencies that are urgently needed to keep pace with power demand, which is expected to hit decadal highs.