Privatizing DISCOMs the Way Out of their Financial Mess
With mounting challenges faced by distribution companies, experienced management needed to help reduce losses and debt
January 27, 2020
The Indian power sector has been reeling under enormous financial pressure over the last few decades. Distribution companies (DISCOMs), a crucial part of the power sector, have been at the center of this. One of the key concerns has long been the inability of these companies to improve their operational and financial efficiencies.
According to the Ministry of Power’s (MoP) payment ratification and analysis portal, PRAAPTI, outstanding dues from DISCOMs to power generators at the end of October 2019 stood at ₹844.45 billion (~$11.83 billion), up by ₹297.76 billion (~$4.17 billion) or 54% from the same period last year.
A significant challenge faced by DISCOMs in India is the increasing average technical and commercial losses (AT&C), which are primarily caused by power theft, poor payment collection procedures, and inadequate tariff hikes. Also, DISCOMs now face new hurdles such as surplus baseload capacities, several idle generation assets, and increasing open access transactions. A steep fall in prices of power generated by solar and wind energy projects are driving their most resourceful commercial and industrial (C&I) customers to engage in private power purchase through open access. If the current situation persists, it will be difficult to see how power utilities in India can recover from the mess they have got themselves into.
The government, under various regimes, has tried to improve the condition of DISCOMs in India through relief packages. The latest was introduced in 2015 when the Bhartiya Janta Power (BJP) government announced the Ujwal DISCOM Assurance Yojana (UDAY) program. Under the UDAY program, state governments took 75% of DISCOMS debt, issuing low-interest bonds to service the rest of the debt. DISCOMs were further supposed to reduce instances of operational and financial mismanagement. Although there were some initial signs of progress under UDAY, the program has not been able to help minimize DISCOM losses.
Meanwhile, there have been multiple reports of DISCOMs delaying payments owed to solar and wind energy developers in Andhra Pradesh, Tamil Nadu, Madhya Pradesh, and Telangana. This is also causing panic among renewable energy project developers and investors. Due to all these challenges, there has been a call for the privatization of DISCOMs from power generators. According to them, this will help DISCOMs augment their ability to collect revenues, reduce debt, and increase earnings.
The CEO and MD of one of the largest private power generators and distributors in India told Mercom, “AT&C losses continue to be high and the reforms that were to happen in terms of implementing new technologies (IT) to improve efficiencies have not happened. But this can be done by getting the expertise of private players who have been successful in the distribution business, be it domestic or foreign companies.”
There are many business models through which DISCOMs can be privatized. These can vary from licensing, distribution franchisee, and profit-sharing models. Through privatization, and by hiring professional and experienced management to lead these distressed utilities, they may be able to fare better. Further, this may enable them to increase revenues, reduce inefficiencies, and provide a better overall consumer experience.
“Distributed generation is not going away, and as solar becomes cheaper and battery energy storage technologies become viable economically, the exodus of retail consumers will become faster. Unless DISCOMs adapt, they will perish in their current form,” said Raj Prabhu, CEO of Mercom Capital Group.
On the challenges faced by some state DISCOMs, Ganesh Srinivasan, CEO of Tata Power Delhi Distribution Limited, commented, “The first challenge for some state DISCOMs is the inability to bill all the customers efficiently. One of the reasons for that is estimated and provisional billing done rather than having regular meter reading. This is made worse because power is being siphoned off in many areas as well by consumers. The second challenge for the DISCOMs is the ability to collect billed amounts from the customer on time.”
Discussing how private DISCOMs such as Tata Power DDL have been able to work more efficiently, Srinivasan said, “There are several systems that we have put in place as a DISCOM that have helped improve reliability, which is our first priority. The second is putting technology to use to detect and prevent theft. Periodic energy audits, use of tamper-proof armored power cables, and also tamper-proof meters are some of the steps we take. Once we figure out where power theft is happening, we work on actions on the operational as well as on the legal front to reduce these incidents.”
“In our license area of North/North West Delhi, Tata Power has been able to help the government of Delhi save an estimated ₹300 billion ($4.2 billion) over 17 to 18 years. Lastly, our goal is not only to run our business profitably but also operate it in a manner so that we can reduce costs for the consumer, in terms of lower tariffs, as well as make a positive contribution to the society through our CSR efforts/initiatives which touch close to 600,000 lives annually.” Srinivasan added.
Tata Power has acquired distribution licenses in Mumbai, Delhi, and Ajmer. Tata Power entered into a similar PPP model after the privatization of the Delhi Vidyut Board in 2002. The aggregate technical & commercial (AT&C) losses in Delhi after the privatization has been brought down from a high of 53% in 2002 to around 8%, according to the company. Recently, it has been awarded the Letter of Intent by the Odisha Electricity Regulatory Commission for the distribution and supply of electricity in Odisha’s five circles that constitute the Central Electricity Supply of Odisha.
State DISCOMs are also facing competition from distributed renewable energy projects such as rooftop solar. There is a need for them to re-work their business models in a manner that is conducive to the growth of rooftop solar and open access power. This is essential as more residential, commercial, and industrial consumers are looking to renewables for clean, sustainable power requirements.
Mr. Nikunj Ghodawat, Chief Financial Officer, CleanMax said, “There is an emerging macro trend of sourcing renewable energy directly by corporates that is gaining momentum, with India retaining its position as the second-largest market for corporate renewable PPAs for two years in a row now. As ‘decentralized’ renewable power generation has increased in the total energy mix, it is of prime importance for the DISCOMs to reinvent their revenue model with a focus on adding value to distributed generation and open access business models.
“Privatization of DISCOMs will assist in reducing transmission and distribution inefficiencies and improving the health of the distribution companies, which is crucial to attracting long term capital in the sector. This will also enable the next set of reforms for the sector towards the disintegration of content and carriage. Additionally, just like amendments in the Electricity Act of 2003 that introduced the concept of open access in India, a comprehensive national policy to encourage rooftop installations; and establish the right of consumers to use their rooftops for self-consumed solar power, would be a good start. These measures will ensure that the sector gets long-term stable and uniform policies that will accelerate private sector investments in the renewable energy sector,” Ghodawat added.
The electricity regulatory bodies in India are also to be blamed for the current situation of DISCOMs. Until they are given the autonomy to take steps to stem DISCOM losses, there is little chance of improvement. An executive from a financier of power projects in India told Mercom that “Privatization of DISCOMs won’t work until we address the systemic challenge that they face, State Electricity Regulatory Commissions (SERCs) do not formulate tariff orders on time and defer tariff hikes, this adds to the inability of DISCOMs to make any money. Because of this, DISCOMs continue to take a financial beating because of the inconsistent increase in tariffs.”
Unless regulators are given the independence to do their job, there is no chance of DISCOMs making progress.
“The status quo is not working. DISCOMS are at the root of all the problems in the Indian energy sector. Due to their financial ineptitude, attracting investments into the sector has become incredibly challenging. Programs like UDAY have been introduced in the past and have failed to fix the underlying problems. Unless steps like privatization of DISCOMS is put on the table, chances of a turnaround in the energy sector are minimal,” added Prabhu.
Shaurya is a staff reporter at MercomIndia.com with experience working in the Indian solar energy industry for the past four years in various roles. Prior to joining Mercom, Shaurya worked with a renewable energy developer and a consulting company. Shaurya holds a Bachelors Degree in Business Management from Lancaster University in the United Kingdom.