The financial well-being of discoms is critical not only for ensuring a strong power distribution system in a country but also for capacity generation and unhindered power supply. However, a number of discoms are facing financial challenges despite several initiatives by the government to revive them.
Key issues affecting discoms
The major challenge for discoms is the rising power purchase cost. The power purchase cost accounts for almost 70 per cent of the total cost. Therefore, an increase in the purchase cost, mostly due to the rising cost of fuel and dependence on expensive imported fuel, significantly impacts the total cost. There is a wide gap between the approved and the actual cost, with the latter being more than the former in all cases. This discrepancy hinders the flow of information to customers.
A number of discoms have high aggregate technical and commercial losses, averaging over 25 per cent across most states. Another challenge pertains to coal freight rationalisation. The central government has rationalised the coal freight charge by decreasing it for distances more than 700 km, and increasing it for distances from 200 km to 700 km. Further, a surcharge of Rs 55 has been imposed for loading coal on trains, thereby increasing coal prices, which, in turn, has driven up the cost of generation and tariff rates. Coal India Limited, in January 2018, revised the thermal grade coal prices upwards by 4-18 per cent, thereby increasing the generation costs.
Update under UDAY
The Ujwal Discom Assurance Yojana (UDAY) is under implementation in 27 states and four union territories. So far under the scheme, states and discoms have issued bonds worth about Rs 2,320 billion, which accounts for 85 per cent of the total bond value to be issued, as per the MoUs signed with respect to refinancing discoms’ debts. Of this amount, about Rs 2,090 billion worth of bonds have been issued for discom debt takeover and Rs 230 billion towards the leftover debt.
The main drawback of the scheme has been its slow progress in reducing the aggregate technical and commercial (AT&C) losses, due to which the operational and financial profile of several discoms continues to suffer. The current loss levels continue to remain significantly high in several states such as Bihar, Haryana, Jammu & Kashmir, Madhya Pradesh, Rajasthan and Uttar Pradesh as compared to the target fixed for 2018-19. However, the loss levels of discoms across the country decreased in 2017-18, aided by the reduction in interest cost following the debt refinancing under UDAY. This trend is likely to continue in 2018-19.
Procurement of solar power
There has been a significant reduction in solar and wind power tariffs, which has been a huge positive for the discoms. The solar power tariffs discovered through the reverse auction process would considerably improve the cost competitiveness for future projects and, in turn, reduce the procurement cost and the renewable purchase obligation (RPO) compliance cost for discoms.
In fact, solar tariffs have fallen below Rs 3 per unit, excluding the grid balancing cost, and are more competitive than conventional power tariffs. However, the incremental impact of the solar RPO on the average tariff at an all-India level is limited, given the falling solar power tariffs. ICRA has analysed the impact of purchasing solar power at the average tariffs of discoms on an all-India basis. The solar RPO is assumed to increase from 4.75 per cent in 2017-18 to 10.5 per cent in 2021-22 based on the trajectory approved by the Ministry of Power. The average solar power tariff is assumed to decrease from Rs 5.50 per unit in 2017-18 to Rs 3.50 per unit in 2021-22. The procurement cost from non-renewable energy sources is assumed to escalate by 3 per cent per annum, while the energy demand is likely to grow by 5 per cent during this period. The study concludes that the average cost of procurement of non-renewable energy-based power will become higher than the cost of procurement from renewable sources. However, the overall impact on the retail tariff of discoms is expected to be limited.
The way forward
Reduced procurement prices of solar power along with lowered tariffs are a huge positive for the discoms. However, the share of such solar power projects in the market is very small, thus it may take a few more years for the decreased tariffs to create a meaningful impact on the procurement prices. Meanwhile, the amendment to the National Tariff Policy wherein penalties have been introduced for unscheduled load shedding has come hard on the discoms. The draft also focuses on introducing prepaid smart meters, which will automatically cut off power supply once the credit limit is surpassed. These may prove beneficial for customers but not for the discoms per se.
Based on a presentation by Sabyasachi Majumdar, Senior Vice-President, ICRA Limited