Discom losses need urgent systemic fixes
Non-performance by discoms only explains a minority fraction of cumulative losses of over ₹10L-crore — the real issues are more deep-rooted
India has announced aggressive decarbonisation plans to meet Prime Minister (PM) Narendra Modi’s pledge of net-zero carbon emissions by 2070; many of these plans — especially short-term actions — are tied to the power sector. While India has achieved success in expanding renewable energy supply, such as wind and solar power, a persistent challenge has been electricity distribution companies (discoms), the last leg in the chain of electricity. Most of these in India are owned by state governments, and persistently suffer from high losses, both of energy and financially.
Because discoms are regulated entities in India, with almost all consumer prices set by independent state electricity regulatory commissions, in theory, they should not be loss-making, unless they fail to perform. And while they do have high aggregate technical and commercial (AT&C) losses, a pair of unique financial studies at the Centre for Social and Economic Progress (CSEP) shows that discom non-performance is not the root cause of their financial losses. The problem is more complex and systemic.
Even defining and measuring losses isn’t straightforward. Most government (and discom corporate) accounting is accrual-basis, which measures money as booked. In contrast, we focus on cash-basis accounting, which focuses on money as received. Obviously, this paints a far direr picture of losses. Over 15 years through FY2021, public discoms were found to have suffered a cash-basis loss of ₹10 lakh crore.
If we examine the losses on a per kilowatt-hour (kWh) or per-unit basis, we get a very stark picture. In addition to cash-basis accounting, we normalise losses based on the units sold, instead of the gross units coming into the discom, like the Power Finance Corporation (PFC) does. This is the reason the government found a gap of 0.46 ₹/kWh in FY21 for public utilities, while we calculate a gap of 1.14 ₹/kWh-sold. This translates into a gap of 14.4% compared to the costs.
Regulators stipulate operational targets for discoms, and based on these, they set consumer tariffs (retail prices) to cover projected costs. So, what could be responsible for discom losses? For starters, they could operate their network inefficiently or have high theft. This leads to a “billing loss” – which compares the energy discoms buy from generators with what they sell to consumers. Second, discoms could bill the consumer, but the consumer may fail to pay. This is a collection loss. A third collection loss comes from the state government not paying promised subsidies on time, such as for agricultural or household consumers. The fourth factor is when regulators purposely set an insufficient tariff that is not cost-reflective, ostensibly to prevent a tariff shock to consumers. This creates what is known as a “regulatory asset” on the balance sheet of discoms, to be recovered in the future. Like subsidy non-payment issues, this is also concentrated only in a few states.
Each of the four causes need different fixes. Billing losses in FY21 were 16.4% compared to an average target of 12.9%. Thus, this loss is modest. Reducing billing losses after a point (once stark theft is addressed) isn’t just about political will or managerial efficiency but will require network upgrades.
Consumer collection losses need focused effort and would benefit from smart metres. A large fraction of non-payments, maybe over a third, are from governmental users. Fixing subsidy non-payment requires fiscal propriety by states, and the same goes for regulators.
But even if all four problems identified were fixed, our research found that discoms would still face massive financial losses of tens of thousands of crores per year. Shockingly, adding up all the above components explains only about 40% of accumulated losses. Our research found that there is a massive residual gap of some ₹5.9 lakh crore, or around 60% of the total losses, that cannot be attributed to any specific stakeholder, i.e., discoms, state governments, or regulators. This comes from systemic failures.
The financial gap has enormous ramifications for discoms. Weak cash flows, with dues or receivables from consumers, lead to coping mechanisms such as discoms also failing to pay their own suppliers, including generators. Such payables topped ₹5 lakh crore in FY21, and are a reason most power plants cite discom risk as their biggest worry. In addition, because discoms are cash-strapped, they also have to secure extra funding in the form of both debt and equity. This problem is worsening over time, though the government has taken laudable steps in the last year to resolve generator payables by discoms.
What causes the residual gap? This is a complex issue we will cover in a companion article. However, for some discoms, the residual gap is either non-existent, meaning they have appropriate tariffs, or there is another factor out of the four listed above that dominates the losses. Thus, each discom will need to focus on a different problem. However, the larger problem of residual losses remains. Lowering AT&C losses is important as it will lower consumer costs, but its impact on discom balance sheets only applies towards any excess losses beyond the targets. With the energy transition upon us, we have to fix discoms as soon as possible.
Rahul Tongia, Rajasekhar Devaguptapu, and Nikhil Tyagi are senior fellow, fellow, and research associate, respectively, at the Centre for Social and Economic Progress (CSEP). The views expressed are personal.
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