Loading...

A New Approach to Improve DISCOM Health


24 August 2015 | BRIDGE TO INDIA

A New Approach to Improve DISCOM Health

The poor financial health of India’s power distribution companies (DISCOMs) is deemed to be the weakest link in the Indian power sector and a huge headache for project developers.  It is not just critical for the revival of the power sector but also for the health of public sector banks. Recent estimates by CRISIL suggest that poor progress on tariff reforms and high AT&C losses have cost led to accumulated DISCOM losses of INR 3.75 trillion (USD 56 billion). To put this in perspective: this is equivalent to around 2.7% of India’s GDP.

  • Central government wants states to issue bonds for raising funds at 8.5-9% to refinance power firms’ current high-cost loans (13-14%)
  • In return for reforms, central government will offer funds from schemes such as the Integrated Power Development System and Deen Dayal Upadhyaya Gram Jyoti Yojana
  • The long term growth prospects of the solar sector are contingent upon the financial health of the DISCOMs

In a positive and much needed development, India’s power minister Piyush Goyal recently clarified that the central government cannot be a bailout bank for debt-ridden DISCOMs and that states will have to find their own way out of the crisis (refer). Instead, the central government sees its role as limited to nudging state governments into reforms using a carrot and stick approach. In line with that, the central government is proposing that state governments push through urgent reforms to improve the financial situation of the DISCOMs. Some of the reforms proposed are: i) states should issue bonds for raising funds at 8.5-9% to refinance high-cost loans (13-14%) of DISCOMs; ii) cut the aggregate technical and commercial losses to 15% (currently the average is above 25%; in some states like Jharkhand (42%) and Uttar Pradesh (32%) it is even higher), and; iii) ensure 100% metering and keep the heavily subsidised farm sector on a separate grid.

The carrot offered in return for reforms is funds from schemes such as the Integrated Power Development System and Deen Dayal Upadhyaya Gram Jyoti Yojana. These funds could be linked to the performance of states on reforms.

The root cause for past failures to stabilise DISCOM finances lies in heavy and often short-sighted political interference, leading to – amongst other things – unsustainably low power tariffs. In turn, DISCOMs have always banked on the state and central governments to bail them out at regular intervals. With the central government now refusing to give ad hoc funding to DISCOMs, the pressure to reform is rising.

In face of a looming power sector crisis in the country, there is an urgent need to raise power tariffs and remove inefficiencies. In the short term, solar power might benefit from a power crisis. However, in the long term, the growth of the solar sector is closely linked to the health of the grid, DISCOM finances and the overall economy. As with most other pending reforms, the states seem to be at the steering wheel and not the central government. We hope that economic sense and mature politics will prevail over short term political gains and populism and result in the much awaited power sector reforms.

Other announcements

Last week, the Solar Energy Corporation of India (SECI) announced a Viability Gap Funding (VGF) based allocation of 500 MW in Maharashtra and 250 MW in Gujarat (refer). Also, NTPC announced a new EPC tender for 750 MW in Andhra Pradesh (refer).


Recent reports

India Renewable Compass | Q1 2024

India Renewable Compass | Q1 2024

This report provides a detailed update of all key sector developments and trends in the quarter – capacity addition, leading players, tenders and policy announcements, equipment prices, financial deals and other market developments. It also provides market outlook for the next two quarters.

India PV Module Intelligence Brief | Q1 2024

India PV Module Intelligence Brief | Q1 2024

This report encapsulates quarterly trends in module demand and supply, import and domestic production volumes, supplier market share, break-up by technology and rating, global market scenario, pricing across the value chain, key policy developments and market outlook.

India Corporate Renewable Brief | Q1 2024

India Corporate Renewable Brief | Q1 2024

This report provides an update on key trends and developments in the corporate renewable market including capacity addition, key players, policy & regulatory issuance, financing, PPA tariffs and other market trends.

Corporate renewable market -alternative procurement options

Corporate renewable market -alternative procurement options

Corporate consumers seeking to increase share of renewable power in their consumption mix have the option of using multiple short-term procurement routes like green power exchange, renewable energy certificates (RECs), I-RECs and green tariffs.

India Solar Rooftop Map | December 2023

India Solar Rooftop Map | December 2023

India Solar Rooftop Map is an info-graphic report providing a snapshot of rooftop solar market in India – capacity addition across states and consumer segments, market share of leading players and other key trends. Total rooftop solar capacity is estimated to have reached 14,484 MW by end of 2023. Total new installations in 2023 are estimated at 2,856 MW, up only 8% over previous year.

India Solar Map | December 2023

India Solar Map | December 2023

India Solar Map 2023 is an info-graphic report covering growth of utility scale solar sector – national and state-wise commissioned and pipeline capacity, leading market players and portfolio details of top 16 project developers. Capacity addition in 2023 fell 51% YOY to 5,924 MW taking total utility scale solar capacity to 59,840 MW. Total project pipeline stands at a record 74,161 MW.

To top