01 Jul 2020 22:24 IST

Why does India keep bailing out its power sector?

Despite many attempts at reform, discoms indebtedness keeps mounting; another bailout may be needed

Last month, Finance Minister Nirmala Sitharaman unveiled a new bailout package for India’s beleaguered power distribution sector worth Rs 90,000 crore. This would help state power distribution companies (discoms) to clear their pending overdues that have mounted to Rs 1,08,387 crore at the end of April 2020.

The new bailout package entails strict reform conditions for state discoms based on which Power Finance Corp and REC will lend to discoms to clear their dues to power producers. States will have to take several actions to reform their power sector by introducing direct subsidy transfer, reduction of cross subsidies, rollout of smart meters, among others.

Whether the new package will succeed when other earlier schemes failed, will need to be seen.

Ailing power generators

Listed power generators like NTPC, Adani Power, NHPC and NLC India, among others, have been reeling under the burden of huge unpaid dues. NTPC, Adani Power, NHPC and NLC India are owed, Rs 22,552 crore, Rs 20,347 crore, Rs 3,668 crore and Rs 9,660 crore, respectively.

These companies have seen a spike in interest costs in recent quarters due to delayed payments by discoms. This was caused due to extended working capital cycles owing to delayed realisation of invoices raised on discoms. In July 2019, the Centre introduced a payment security mechanism (either a bank guarantee or a letter of credit) to secure the monthly billings of power generators. But dues have continued to mount despite this move over the past year.

One too many bailouts

In the past two decades, there have been four bailout packages initiated by the Centre for discoms. Five years ago, there was a bailout scheme called Ujwal Discom Assurance Yojana, or UDAY, which had operational and financial targets that discoms had to meet to be eligible under the scheme. States took over 75 per cent of discoms’ debt and issued bonds that were subscribed to by banks and financial institutions.

Before UDAY in 2015, there was a Rs 1.9 lakh crore bailout package announced in 2012. And before that there was another bailout scheme in 2001 that restructured loan payments of discoms. In the intervening period, there have been many measures taken to improve the efficiency of discoms. However, discoms still have been unable to pay their dues on time and remain highly indebted.

The existential problem

The crux of the problem --- which continues to ail discoms despite the various measures taken in the past — is revenue deficit. The cost at which discoms procure power is almost always higher than the revenue that they make from tariff charged to consumers. There are two causes for this — technical losses and gap between average cost of power supplied and average realisable revenue. The former is caused because of loss of energy while transmission through dissipation in the conductors, transformers and other equipment used to transmit and distribute power. The latter is caused because the tariff charged by discoms does not cover its cost of procurement for power.

Improving these two measures (i.e. reducing technical losses and ACS-ARR gap), along with other operational indicators like feeder metering were part of UDAY. States even adhered to tariff hikes to an extent that were mandatory to be eligible for relief under the UDAY scheme.

The inherent problem is the lopsided nature of the tariff structure. Domestic consumers are charged a tariff lower than industrial or commercial consumers. Agricultural consumers are not charged tariff in many states across India. The states also remit money to discoms to bear the subsidy burden.

The thing to keep in mind is the share of power consumption by different types of consumers. Industrial consumers make up nearly 42 per cent of India’s power consumption as of financial year 2018-19. Domestic and agricultural consumers make up 24 per cent and 18 per cent, respectively. Commercial consumers make up 9 per cent of India’s total power consumption.

Precarious state of finances

Keeping this in mind, a fall in industrial activity (as witnessed over the last 10 months or so) has also had an impact on the precarious state of discoms’ finances. Fall in industrial production leads to lower consumption of power across the country. This means there is less revenue from consumers that cross subsidise agricultural and domestic power consumption. In essence, the high revenue earning customers of discoms are not consuming that much electricity.

During the ongoing pandemic-induced lockdown, domestic consumption of power has led to an increase in power consumption in May 2020. But this may not mean much to power discoms’ revenues, as a large chunk of their revenues always came from industries. This in turn puts their finances in jeopardy. The discoms finances that were tottering at the edge before the lockdown imposed in late March 2020, has only gotten worse over the past three months.

Unless the new bailout scheme by the Centre ekes out long pending reforms from states and their discoms, we might need another bailout package soon.