Discom Privatisation, One-Nation-One Tariff For Electricity On The Cards In Modi 3.0

The financial conditions of private discoms across India—be it Maharashtra, Gujarat, Odisha, or Bihar—have been a lot better compared with state-run discoms over the last two and a half decades.

The aggregate transmission and commercial losses for private discoms are below 10%, compared with 30–35% for state discoms in Rajasthan, Bihar, and Uttar Pradesh. Adani Electricity, Tata Power, Torrent Power, and CESC have all managed to run the areas under their purview with distribution losses below 10%.

The government had envisioned privatisation as a major reform under the Electricity Act 2003. But the higher difference or gap between the average cost of supply, or ACS, of power and the average revenue realised, or ARR, by the discoms is the biggest concern today, Rahul Raizada, partner power and utilities at PwC India, said. "Reducing the gap would be the top priority of the government by nudging discoms to raise tariffs.”

The discoms' inability to pass on the higher cost of power purchased to customers due to populist government policies has resulted in an increase in state subsidies. According to the Ministry of Power State Subsidy, it has increased over sixfold in the last 10 years to Rs 1.4 lakh crore.

In most states, the growing losses and indebtedness of discoms are managed through state government support, which includes a variety of measures such as revenue subsidies provided to ensure that certain consumer segments can afford power. In 2021–22, the support amounted to Rs 1.4 lakh crore for all state-owned discoms, as per the PFC Report, 2023.

On average, such subsidies amount to about 18% of the revenue required by the discoms. However, in Karnataka and Madhya Pradesh, the support is as high as 40% to 50%, Prayaas (Energy Group), a research and analysis organisation, said in a report.

“Higher subsidies have led to poor allocation of funds for improving the technological prowess of discoms across several states,” Rupesh Sankhe, vice president and power analyst at Elara Securities, said.

Many states failed to regularly revise their electricity tariffs, despite an annual 4% cost increase. Between 2001 and 2020, there was no increase for seven years in Rajasthan and 10 years in Tamil Nadu. The delays in recovering legitimate debts increased the interest burden. But things have improved a lot in the last two years, with states now filing regular tariff petitions and states like Maharashtra have come out with five-year tariff trajectory with regular mid-term revisions. Several states are now also charging fuel surcharges in tariffs, improving the recovery of power costs more efficiently.

Sankhe also noted that there could be issues with respect to the one-nation, one-tariff policy as well, which is long under discussion and is now even demanded by one of the NDA's alliance partners, Janta Dal (United).

As a state, Bihar has a comparatively higher power purchase cost of Rs 4.86 per kWh, compared to an average of Rs 3.5 per kWh. “States with efficient discoms would be unwilling to share the loss. Discoms can still pass variable costs, but if they enter a power purchase agreement, they will have to pay the fixed cost, according to Sankhe.

Market-Based Energy Dispatch (MBED) is already in discussion on variable costs, but the fixed component depends on power purchase agreements, Sankhe said. He stated that the uniform power procurement costs across the states have not taken into account the useful life of plants.

However, some believe the reforms will continue because of the progress made in the last 10 years, led by policy changes and improved financial conditions of discoms.

The difference is visible across the three segments of generation, transmission, and distribution, Sharad Mahendra, managing director and chief executive officer of JSW Energy, said. “Overall outages have dropped drastically. Fuel availability has improved both domestically and for imported fuel,” he said.

There are ongoing discussions and deliberations about the one-nation-one tariff to include all states, but it might still take some time to reach a consensus.