Power producers at risk, courtesy ailing discoms

As per reports, power plants with investment of over Rs 300,000 crore are in jeopardy as the state electricity boards [SEBs]/power distribution companies [PDCs] have not yet paid dues of about Rs 60,000 crore for the electricity purchase made by them.

The concern is understandable as with so much money locked up in receivables, it is nearly impossible for the generators to run their plants. The situation is particularly critical for independent power producers [IPPs] who account for half of the dues and run the risk of turning into non-performing assets [NPAs].

The current scenario is a continuation of a trend seen for decades whereby SEBs/PDCs – faced with substantial shortfall in their revenue from sale of electricity to consumers vis-à-vis the cost of purchase and distribution – perennially grapple with cash flow problem. This in turn, has a contagion effect on power producers due to short payments or suspension in payments.

The genesis of deficit in revenue has to do with the directive issued by the owners [read: state governments] to SEBs/PDCs to fix tariff on supplies to poor households and farmers at artificially low level [in some states even zero] unrelated to the cost which is substantially higher. Despite charging more from industries and businesses, they have to live with un-covered deficit.

If, SEBs/PDCs were not state owned, they would have downed their shutters long back. But, the very fact of the ownership and control being with the states has ensured their survival. They have been enabled to stay in business vide support extended by the state from time to time under the financial restructuring package [FRP] coordinated by the union government. Since 2000, three such packages have been sanctioned, latest being in 2015 under UDAY [Ujwal DISCOM Assurance Yojna].

In lieu of the FRP, these distribution companies were expected to implement measures to improve their realization from sale of electricity on the one hand and reduce cost of purchase and distribution on the other. Among the former, they were to increase tariff and reduce technical and commercial [T&C] loss – a euphemism for power theft – whereas, in regard to the latter, they were given flexibility to purchase power from the least cost source.

On their part, the state governments took upon themselves an obligation that in case, they intended to charge less from farmers and poor households – purely as welfare measure – then the resulting subsidy will have to be paid for by them from their respective budgets. Indeed, the ruling establishment in majority of the states took this course as it was in sync with their vote bank politics.

Ironically, the states have not lived up to their commitment. Even as, tariff continued to be kept low, they have failed to reimburse the SEBs/PDCs for the consequential loss. As a result, the latter are not able to make payments to the suppliers. With elections round the corner and states splurging expenses in other areas, they have even lesser funds for paying power bills.

Under SAUBHAGYA Yojna, the government has given free electricity connections to over 25 million households even as it has set a target of covering 40 million households under the scheme. Considering that majority of these are poor families and hence unable to pay, SEBs/PDCs have pending dues from them as well. This has also aggravated their cash flow problems.

The distribution companies have also not been able to achieve the milestones expected of them under UDAY. For instance, they were required to bring down the T&C loss to 15% by 2018-19 but most of them continue to post loss in excess of 25%. This is happening despite the centre spending lot of money in strengthening and upgrading the transmission and distribution infrastructure – thereby minimizing scope for technical leakages – shows that theft with support of corrupt politicians continues unabated.

Even in regard to increase in tariff – another key area where they were required to achieve milestones under UDAY – after a good start during the first two years, since 2018-19 most of them have become lax. Here, the crux of the problem lies in states’ unwillingness to charge more from poor households and farmers even as they keep increasing tariff on supplies to industries and businesses.

This is unsustainable as any amount of hike won’t improve the finances of SEBs [even while making our industries un-competitive] unless the real problem of a sizeable chunk of supplies to farmers and households at heavily subsidized tariff is tackled.

In September, 2018, the center had proposed amendments to the Electricity Act [2003] that included capping the cross-subsidy to consumers within a distribution area to 20% immediately to be followed by complete elimination progressively within 3 years and if a state wants to give subsidy to a particular category of consumers, the same should be given as direct benefit transfer [DBT].

For instance, in Delhi currently, a household consuming <200 units a month pays only Rs 1 per unit against average cost of Rs 7.4 per unit. As per centre’s proposal, it will now have to pay Rs 5.9 per unit [80% of 7.4] immediately. If, Delhi government is keen that the household continues to pay @ Rs 1 per unit only then it will have to transfer Rs 4.9 per unit into its account as subsidy.

This measure will ensure that the SEBs/PDCs will be viable without having to charge the industries any amount higher than the cost. Once, these distribution utilities turn financially sound, they will be able to make timely payments to the generators thereby helping them come out of their present stress.

Unfortunately, the proposed amendments are unlikely to find favor with majority of the states even as CM, Delhi has already protested. In short, they will neither shun cheap/free supply nor foot the bill and not even make serious efforts to curb theft.

In today’s scenario wherein the narrative is dominated by vote bank politics, the chances of distribution utilities turning around and consequential relief for power generators look bleak.

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