Power discoms await revival as structural reform delays persist in India

Power discoms posted a Rs 2,701 crore profit in FY25, but heavy subsidy dependence, weak tariffs and persistent operational gaps continue to threaten a durable revival

Power distribution companies (discoms) turned profitable in 2024-25 (FY25), registering a profit after tax of ₹2,701 crore against a loss of ₹25,553 crore in the previous financial year. Those numbers, however, obscure a disturbing picture: India’s distribution sector revival still remains very much a work in progress. 

While discoms look strong on the surface — and on the balance sheet — a closer look reveals that many of them are heavily dependent on government subsidies, while themselves lacking the resources to invest in much-needed modernisation. But without deep structural change  — one that addresses the core issues of electricity theft, network improvements, and high payable days — real and meaningful reforms of discoms will remain elusive, experts say. 

Subsidy dependency 

One problem is that without subsidies, most discoms on an aggregate basis would post sizeable losses, with the exception of those in Gujarat and the privatised successes in Odisha and Delhi, according to an S&P Global Ratings report. Power discoms are mostly owned by state governments, and provide the distribution and supply of electricity to end-consumers — but they have a history of late payments to power generating companies. 

Referring to the outsized role played by subsidies and grants in discom profitability, S&P Global credit analyst Neel Gopalakrishnan said these power sector transfers make up an increasing proportion of government spending,

putting the sustainability of such transfers at risk. 

“Structural reforms will be needed to put discoms on a sustainably improving trend, including spending for much-needed modernisation,” he said, adding that steady improvements in discoms’ earnings before interest, taxes, depreciation, and amortisation (Ebitda) and liquidity are only partly due to better operational efficiencies (such as tackling electricity theft or making network improvements). 

The stronger financials are largely backed by increased government subsidies, larger grants, and ad hoc cash injections.

“If subsidies were sustainable, the Indian state discoms could maintain a stable credit profile. However, herein lies the big risk: Given subsidies are increasing steadily in relation to state government revenue, maintaining such high levels of transfers to state discoms may not be sustainable over the long run,” said Vernice Tan, also a credit analyst at S&P Global Ratings.

While their reported profits have steadily improved, most state discoms are not yet on a stable reform path, as they would be deep in the red without subsidies. Moreover, Ebitda-level losses over the past three years are about 40-50 per cent higher than in the three previous years. The Ebitda of 18 large discoms, for instance, has grown from ₹0.18 trillion in FY20 to ₹1 trillion in FY25. 

But stripped of their subsidies, their Ebitda losses have widened from ₹1.25 trillion to more than ₹2 trillion over the same period.

“We do not think the growing reliance on subsidies is sustainable, given fiscal weakness for some states. State government subsidies, grants and other financial support to discoms have increased 2.4 times from fiscal 2019 to fiscal 2025. They now make up more than 7 per cent of state government revenues, up from about 5 per cent in fiscal 2019. And on average, such support represented about 30 per cent of the discoms’ revenues,” S&P Global said in its report. 

Subsidies work 

To be sure, state subsidies have helped discoms improve the timeliness of payments to generators and reduce debt — without this financial help, discoms could well have caused severe stress in the power sector. The discoms’ payable days on average — the average number of days a company takes to pay its bills and vendor invoices — declined to 113 in FY25 from a high of 176 in FY21, helping improve the working capital position of the power generation sector. 

Similarly, the gap between the average cost of supply (ACS) and average realised revenue (ARR) has steadily narrowed, again supported by subsidy payments. At the national level, the gap has narrowed from around ₹1 per kilowatt hour between FY19 and 21 to about ₹0.1 per kilowatt hour in FY25. 

Most importantly, incentive-based grants from the government, tied to improvements in operational performance, have helped cut losses to a degree. These grants go towards addressing issues such as network inefficiencies, electricity theft, billing and collection inefficiencies, collectively known as aggregate technical and commercial (AT&C) losses. “At a national level, between fiscal 2019 and fiscal 2025, AT&C losses reduced by an average of 6 percentage points. This translates into estimated savings of about ₹700 billion (70,000 crore) across all discoms,” the report said. Most of these gains came from Uttar Pradesh, Rajasthan, Madhya Pradesh, Tamil Nadu, Karnataka, Gujarat, Odisha and Haryana. 

Narrowing gap 

Meanwhile, the government has also taken a series of steps in the past few years to address the financial and operational issues faced by discoms. For example, a late payment surcharge rule, introduced in 2022, brought in a system of payment of current dues and liquidation of past dues. 

The government has also introduced automatic pass-through of fuel cost for discoms in December 2022. Power procurement cost, of which fuel is the primary component, accounts for 70-80 per cent of the total ACS and had been a major burden for utilities in their effort to bridge the gap between ACS and ARR. The new rule enables automatic and monthly pass-through of fuel and power purchase adjustment surcharges to consumers, reducing the need for prior approval from regulatory commissions. This has largely resolved the historical issue of lack of cost-reflective tariffs. 

The improved health of discoms is also due in part to efforts taken to speed up smart metering, and the implementation of the Revamped Distribution Sector Scheme (RDSS) launched in 2021. The RDSS is a reforms-based and results-linked scheme that provides for financial assistance for distribution infrastructure works to discoms subject to meeting pre-qualifying criteria and achieving basic minimum benchmarks. 

Tariff reforms crucial 

However, despite successive reform programmes, such as the Ujwal Discom Assurance Yojana (UDAY) and the RDSS, many utilities continue to face significant financial and operational challenges, said Vibhuti Garg, director for South Asia at the Institute for Energy Economics and Financial Analysis. 

“Addressing these persistent challenges will require structural reforms, with tariff rationalisation playing a central role,” she said.

“Resolving these weaknesses assumes even greater importance as India pursues its clean energy goals.” 

According to S&P Global Ratings’ analysts, progress has been made but some states are far from finding permanent solutions for loss-making discoms. Strengthening the structure of discoms will involve a strong regulatory framework, steps to ensure a tariff that is cost-reflective, and lower dependence on state subsidies, they said. 

While political compulsions may make it difficult to eliminate subsidies entirely, building an efficient and predictable system can make a meaningful difference.