In today's Finshots we talk about the new reform linked scheme to improve the health of the power sector


The Story

Every power story begins with the same introduction and this one is no different.

There are three main stakeholders in the industry.

First, we have the Gencos — The power generators. The good folks that tap into nature’s abundance and whip up electricity. Second, we have transmission companies — Institutions responsible for transferring the electricity from power stations to states far and wide. Finally, we have the distributors, the Discoms — people responsible for bringing electricity to your home.

In an ideal world, once power makes its way to the Discoms, they ought to be able to sell it to the end consumer, as is. Unfortunately, that doesn’t happen. Instead, there are leakages at multiple touchpoints. Maybe the transformers are old and dingy. Maybe the power lines are poorly maintained. Maybe the chap next door is siphoning electricity by tampering with the meter. It’s all on the cards and therefore Discoms are rarely able to monetise all the electricity that comes their way. Some of it is forever lost in the void.

And this is bad news for the industry. Especially the Discoms — who are mostly owned by state governments and burdened with boatloads of debt.

In the past, the government has tried to fix the problem by incentivizing state governments to upgrade the distribution infrastructure and improve their billing and collection efficiency. They did this primarily by taking on some of the debt. However, after making some improvement, Discoms went back to their old ways and their debt burden started building up once again.

So the government is trying to do something different this time around.

They have adopted to ditch the “one size fits all” approach and instead try a more nuanced formula for different states. For instance, Maharashtra’s problems aren’t the same as Rajasthan’s problems. In Maharashtra, they’ve done a fair bit to improve their operational and financial performance. But their biggest problems seem to stem from the fact that they have high AT&C losses (aggregate technical and commercial losses).

What’s that you ask?

Well, it includes energy loss (due to poor infrastructure, theft, or inefficient billing techniques) and commercial loss (where they fail to collect money from people). For instance, the state routinely struggles to collect payments from agricultural consumers and they don’t have the most robust metering equipment. In Rajasthan however, the big problem seems to be the lopsided power purchase agreements. They’re still paying a king’s ransom to purchase power, but they haven’t increased tariffs since 2015/16 i.e. there is a fundamental mismatch in procurement cost and the kind of money they’re roping in.

So the solutions have to be different as well. And this time around the government has set aside 3 lakh crores to incentivize state discoms and help them improve on all fronts. Also, the monetary benefits will only be available at the end of the year if certain targets are met. And the hope is that this will inevitably help us achieve some central objectives.

  1. Improve infrastructure and reduce the AT&C losses to 12–15% by 2024–25 i.e. We've got to stem the flow of money by reducing energy loss and billing/collecting payments efficiently.
  2. Make sure all the Discoms are purchasing power at a nominal price and are realizing revenues commensurate to the kind of money they're spending in buying this power
  3. Finally, the government also wants to make sure consumers get a better deal in the process as well

And while you could argue if the new scheme will be any better, the intervention couldn’t have come at a better time.

During the past year, most industries in India were forced to shut shop, and power consumption had fallen off a cliff. The meter readers couldn’t check the readings and Discoms couldn't collect payment (in most cases). All things considered, these institutions are expected to lose thousands of crores in revenues. This is income they’ll never be able to recoup. And unlike other goods and services, there’s no scope for ‘pent up demand’ either when it comes to electricity.

It’s gone forever.

So considering how bad the current situation is (no pun intended), we hope that this scheme fixes some of the systemic issues plaguing the industry.

Until then...

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