Discom Finances

Cost coverage, tariffs and profitability trends

Renewable Watch recently organised a workshop, “Offtake Risks for Re-newable Energy”, to examine the financial health of discoms, discuss the risks and challenges pertaining to power offtake, study the alternatives and propose solutions. The workshop also highlighted the key features and the various legal nuances of solar and wind power purchase agreements (PPAs), execution challenges and the way forward for their enforcement. This section covers the key takeaways from the workshop…

The power distribution segment in India has been facing a lot of difficulties owing to the poor financial condition of the state-owned distribution companies. There is a gap in the average cost of power supply and the actual revenue realised by the discoms including subsidies provided by the state governments. In fact, the historical data for the past five years suggests that this gap has only decreased from Rs 1.16 per unit in 2012 to Re 0.80 per unit in 2016, owing to an insignificant change in revenue realisation for the discoms. As a result, discoms had a total book loss of as much as Rs 633 billion in 2016. In fact, the financial condition of discoms in certain states is so dismal that there is a lot of delay in making monthly payments for the power purchased to solar and wind generators.

The Ujwal Discom Assurance Yojana (UDAY) was introduced to improve the financial condition of the discoms. As of May 2017, 27 states and union territories had signed an MoU with the Ministry of Power (MoP) under this scheme to bring about a total turnaround in the financial and operational performance of their discoms. Improvement in the financial health of discoms is mainly dependent on the reduction in aggregate technical and commercial (AT&C) losses, increase in billing efficiency and tariff adequacy. However, even UDAY has not been able to pull the discoms out of their financial crisis, as many factors have halted the increase in discom revenues.

It has been observed that no new tariff orders were issued in many states for 2017 and 2018, in contradiction to the MoUs signed under UDAY. Many states still do not have any provision for levying fuel and power purchase cost adjustment (FPPCA) charges. These charges can actually help discoms in bridging the gap between their cost of purchase and cost of supply. Also, no tariff hike was carried out in many states for fear of losing favourable votes. In states like Bihar, Uttar Pradesh, Punjab, Rajasthan and Haryana, AT&C losses are still very high, and the reduction in losses as expected under UDAY has not been realised.

Credit ratings of discoms

The MoP carried out its fifth annual discom rating exercise in 2017. The exercise revealed a bleak picture, with 30 out of 41 utilities rated as “B+ and below” and at least 12 utilities rated as “C+ and below”. The rating exercise carried out by ICRA Limited and Credit Analysis and Research, and coordinated by the Power Finance Corporation highlights the low operational and financial performance of the discoms, which has improved only marginally since 2016, when 13 utilities were rated as “C+ and below”. On comparing the results of 2016 and 2017, it was observed that 12 utilities had improved their ratings from the previous year, mainly through reduction in AT&C losses, improvement in cost coverage and the timely receipt of subsidies from states. Meanwhile, seven utilities had decreased their ratings from the previous year, owing to a combination of factors like no increase in tariffs, high dependence on subsidies from the state, and increase in AT&C losses. It was observed that the credit rating of utilities in Gujarat and Karnataka was above average and had remained stable over the years; while in a state like Uttar Pradesh the credit ratings were below average. A key contributing factor here is the political will of the state government and the strict compliance to regulations by the responsible state electricity regulatory commission (SERC).

Impact of buying renewable energy on discoms

It is believed that solar photovoltaic (PV) and wind energy might help discoms in improving their financial health, led by the tariff competitiveness of wind and solar energy against traditional coal-based energy, as a result of aggressive competitive bidding. As per ICRA, the country’s energy demand will grow by 5 per cent per annum and the cost of energy from fossil fuels for discoms will increase by 4 per cent per annum. At the same time, the renewable purchase obligation (RPO) will reach 12.5 per cent in 2022, while the tariff for renewable energy will decrease to Rs 3.80 per unit. ICRA predicts that while no impact will be seen on retail tariffs for discoms after the inclusion of renewable sources, the cost of purchasing renewable power will become significantly lower than that of fossil fuel-based power for discoms, which will be a win-win situation for discoms as well as consumers.

Increased procurement of low-cost renewable energy, along with a decrease in the dependence on imported coal, will lead to a lower average cost of power purchase for discoms. ICRA’s estimates indicate that the subsidy dependence of discoms will increase each year, which, combined with a comparatively less increase in the power purchase cost for discoms, will ultimately reduce discom losses to some extent in the future. However, it is imperative for the SERCs to give importance to tariff revisions and reduction of AT&C losses, to ensure the maximum benefit from procurement of low-cost renewable power.

Future outlook

Solar and wind tariffs have sunk to as low as Rs 2.50 per kWh, as seen in the recent bids, which bring them at par with tariffs from traditional sources of energy. While there are no hidden costs associated with coal-based power, which includes only the fixed cost and variable cost, the actual cost of renewable energy is much higher than the quoted tariff for the discoms. Discoms have to pay the price in the form of penalties for the intermittency issues associated with solar and wind energy, which makes their scheduling and forecasting difficult. Discoms will have to pay additional charges for unutilised transmission capacity, owing to the low capacity utilisation factor of renewable energy. There is a concern among the utilities that increasing the renewable energy share in their total energy mix will lead to an additional burden on them. The utilities will have to shut down thermal plants due to the “must-run” status of renewable energy plants, and still have to pay fixed charges to generators. This “must-run” status will oblige discoms to buy costlier power from older solar and wind plants. Frequent shutdown and start-up of coal plants would lead to an increase in fuel consumption, and hence, an additional cost would have to be borne by discoms.

For the aforementioned reasons, discoms in many states like Rajasthan hesitate in adding renewable energy greater than 30 per cent to their total energy mix. UDAY is expected to boost the renewable energy sector further, as it may oblige states to comply with their renewable purchase obligation targets. Improved financial state of discoms in the future will ease the risk of payment defaults for solar and wind generators and may further decrease the cost of power purchase from renewable energy for discoms. A general consensus exists among discoms that in order to increase renewable energy uptake and reap the benefits from the freely available resources, there will be a mechanism to address the financial implications of balancing energy requirements for discoms.

Based on presentations by Sabyasachi Majumdar, Senior Vice-President, ICRA, and Vibhash Garg, Director, Energy and Utilities, PwC India.

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