New DISCOM reform package: old wine in a new bottle

19 July 2021 |

The Union Cabinet has approved yet another DISCOM reform package worth INR 3 trillion (USD 40 billion). The package, titled ‘Revamped reforms-linked results-based distribution sector scheme,’ aims to “…improve operational efficiencies and financial sustainability by strengthening supply infrastructure….” Targets include reducing total network losses of the DISCOMs to 12-15% (current estimate 22%) and financial losses to zero (current estimate INR 0.90/ kWh) by FY 2026. The scheme is proposed to be funded partly by central government grants totalling INR 976 billion (USD 13 billion) conditional upon the DISCOMs meeting annual performance milestones.

  • The package is essentially an amalgamation of various ongoing schemes;
  • Various government attempts to resolve DISCOM financial condition have yielded almost no results to date despite a huge financial cost;
  • Lack of imagination and political will on part of the government to fix the distribution sector is a troubling sign for the industry;

The new package has two main components: i) smart metering, with a 100% rollout target including for agricultural consumers in OPEX mode – an estimated 250 million installations; and ii) network upgradation and expansion comprising substation augmentation, agricultural feeder separation, installation of new lines and equipment. The DISCOMs would also be required to develop and implement plans for reducing technical and commercial losses.

Table: Funding plan

Our primary reaction to this new package is utter disappointment. The package is essentially just an amalgamation of various ongoing schemes – smart metering, rural electrification, feeder separation and network expansion – which have failed to make any impact so far. It does not even attempt to identify and address roadblocks in existing schemes. Smart meters are a good example – they were first mooted in 2013, ambitious targets were announced as part of Integrated Power Development Scheme, National Smart Grid Mission and National Tariff Policy through 2014-2016 and in 2019, the government announced 100% rollout by FY 2023. But actual progress at present stands at less than 10%.

Similarly, targets for reducing total DISCOM network losses and financial losses to 15% and zero respectively have been announced multiple times with barely any progress. Notwithstanding UDAY and recent liquidity package providing total liquidity worth a staggering INR 3.7 trillion (USD 50 billion) on a conditional basis to the DISCOMs, their operational and financial performance continues to deteriorate. The DISCOMs are expected to register their worst ever financial performance in FY 2021, partly due to COVID. 

Figure: Key technical and financial performance indicators for DISCOMs

Source: PFC annual performance reports of state power utilities
Note: Figures for FY 2020 and FY 2021 are market estimates.

The government seems hopeful that the new package along with the Electricity Amendment Bill, proposed to be passed through the Parliament in the monsoon session, would be sufficient to fix all problems in the distribution business. However, the proposed measures seem unimaginative and ineffective. Failure to resolve the distribution sector is a worrying sign.

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