The power to reform: Tariffs a key issue for revival of gencos, discoms

Union Power Minister M L Khattar’s advice to power companies, including generating and distribution companies (discoms), to list on stock markets would have been persuasive if these entities had subjected themselves to the rigours of the market. But India’s power market has been uniquely distorted by politically motivated tariff policies that affect the financial viability of state-run discoms. Indeed, Mr Khattar noted that discoms had racked up a cumulative debt of Rs 6.84 trillion and accumulated losses of Rs 6.46 trillion. These staggering numbers partly reflected the combined impact of a record demand in 2023-24, and a rising cost of expensive imported coal. The upshot was that 16 states —including large ones like Uttar Pradesh, Telangana, Maharashtra, and Punjab — saw financial losses jumping significantly.

 

This is increasingly raising questions over the wisdom and efficacy of taxpayer-funded bailouts of the sector. In the past two decades, the Government of India has offered discoms five bailout schemes. The impact of the latest, the Revamped Distribution Sector Scheme, or RDSS, launched in 2022, has been less than optimum. This is principally because of discoms’ inability to find the money to upgrade infrastructure and introduce smart metering schemes, and so on, which are operational preconditions for budgetary grants from the Centre. The RDSS replaced the Ujjwal Discom Assurance Yojana (UDAY), which aimed to clear discoms’ accumulated financial and operational losses by allowing states to take over the debt and issue bonds on the understanding that power tariffs would be aligned closer to cost, and aggregate technical and commercial (AT&C) losses would be brought down. Instead, since the scheme ended in 2019-20, discoms’ financial performance has worsened. The AT&C losses, an indicator of the ratio of power procured by discoms for which they did not receive payment, increased to 17 per cent in 2023-24 from 15 per cent the previous year. Notably, the difference between a discom’s average cost of supply (ACS) — the cost of purchasing power — and the average realisable revenue (ARR), or the cost of supplying power, narrowed from Rs 0.45 per kilowatt hour in 2022-23 to Rs 0.21 kwh in 2023-24. But as Mr Khattar pointed out, this gap must be brought down to zero.

 

Put another way, states need to bite the bullet and raise tariffs across the board. Yet, as highlighted by ICRA, tariff hikes by state regulators remain modest, with a median rise of 1.7 per cent during 2024-25, which is lower than the 2.5 per cent approved in the previous year. Most states bridge the gap through cross-subsidies, charging industrial and commercial customers a premium to underwrite the cost of free power supply to politically sensitive consumers. Although the National Tariff Policy limits the level of cross-subsidy to plus or minus 20 per cent of ACS, most states do not comply with this limit. The result is a higher cost of doing business at one end of the spectrum, and wastage of resources on the other. These structural problems also hinder the dynamics of providing wind and solar power through grids to meet climate-change commitments, with only a handful of states meeting renewable purchase obligation targets. Market-linked power pricing has been the writing on the wall since the sector began to be liberalised in 1991. Without that basic change, the Indian economy’s power supply chain will remain sub-par.