Rewiring power reforms: Discom profitability is an encouraging start

India's discoms return to profitability after a decade of losses, boosted by fuel cost pass-through, smart metering, and sector reform incentives

State power distribution companies’ (discoms’) return to profitability after a decade of being in the red offers hope that reform, which has eluded this sector, is finally paying off. In 2024-25, discoms collectively recorded profits of ₹2,701 crore, a major turnaround from the losses of ₹25,553 crore in 2023-24. Chronic loss-making discoms in states such as Punjab, Bihar, Kerala, Himachal Pradesh, and Madhya Pradesh all turned in profits for FY25. Behind this encouraging performance are a host of little-noticed but significant decisions that forced a degree of much-needed financial discipline among discoms. 

Chief among them was the implementation in 2022 of the automatic pass-through of fuel costs for distribution companies, with 30 of the 36 state and Union Territories adopting the rule. Given that fuel accounts for 70-80 per cent of the discoms’ average cost of supply (ACS), the ability to recover this major expense has had a salutary impact on discom profitability. A simultaneous surge in smart metering — from 4,000 per day in FY23 to 115,000 per day in FY25 — has helped reduce power theft, which has long been a bane of the discoms. At the same time, a Revamped Distribution Sector Scheme — the fifth bailout plan in two decades — upped the incentive for improvement by linking access to discounted funds for infrastructure upgrades to measurable targets. 

The results of these critical tweaks have been notable. The gap between the ACS and the average revenue realised (ARR) in FY25 narrowed dramatically from 65 paise per unit in FY21 to just 6 paise. With smart metering, the aggregate technical and commercial (AT&C) losses fell from 22.6 per cent in FY14 to 15.04 per cent in FY25. The Revamped Distribution Sector Scheme played its part in improving discom finances by making the payment of government dues and subsidies mandatory. The cascading benefit of these improvements with discoms paying their dues to generating companies on time is due also to an overhaul of the rule governing late payment. 

Though this progress is promising, it does not yet point to the fundamental reform that can place the sector on a financially sustainable path. In fact, discoms ended FY25 with accumulated losses of ₹6.47 trillion. The basic problem is that most states continue to rely on support from their Budgets or subsidies to keep agricultural power rates low or free. The Punjab regulator, for instance, raised agricultural power tariffs in FY24 and FY25 but the higher cost was borne by the state; power for farmers remains free. To cover this rising burden, most states (including Punjab) resort to cross-subsidies, raising tariffs for industrial and commercial consumers. But high power tariffs have long impinged on India’s manufacturing competitiveness. The draft Electricity Amendment Bill, 2025, yet to be presented to Parliament, states that it seeks to eliminate these legacy structural deficiencies even as it promises to fully protect tariffs of farmers and low-income households. Achieving these contradictory aims has so far eluded India’s power sector. Competition in the retail business, as this Bill suggests, may just be the silver bullet the sector needs.