Last week, a news report suggested that Madhya Pradesh DISCOMs have accumulated losses of INR 250 billion (USD 3.5 billion). The DISCOMs have requested the state regulator to allow increase in grid tariffs for recovery of losses. It is feared that average power tariff may have to rise by INR 2.00/ kWh or more as a result. The situation is similarly grim in Tamil Nadu, where aggregate DISCOM losses have touched INR 1 trillion (USD 14 billion) because tariffs have stayed flat for five years. The state government is not even allowing the DISCOM to present a tariff increase petition to the regulator.
- Tariffs have failed to keep up with rising costs across most states;
- There seems to be rampant misreporting in financial numbers by DISCOMs with various errors reported by external observers;
- While long-term reform is deliberated, meaningful tariff hikes can provide much needed relief to the DISCOMs and power producers;
Madhya Pradesh and Tamil Nadu are not isolated examples. Combined DISCOM losses increased by 89% in FY 2018-19 to INR 284 billion as tariffs have failed to keep up with rising costs. To make matters worse, the state governments and public sector consumers are falling further behind in making subsidy and power purchase payments respectively to the DISCOMs. At the same time, post UDAY, banks have cut lending lines to DISCOMs, who have been under pressure to supply 24×7 power throughout the country at subsidised tariffs.
This is a perilous position for the entire power sector and it is not a surprise that payment delays to power producers are rising alongside other insidious practices of curtailment and tariff renegotiation. Worryingly, actual picture may be even worse as there is a question mark about reliability of financial numbers put out by DISCOMs. Last year’s results have been already revised by several DISCOMs. A recent report by Prayas, an energy think-tank, on growing use of subsidies in power distribution contends that: i) subsidy amounts are often not (correctly) reported by the states even to Power Finance Corporation, a Government of India-owned financial institution and the only entity to undertake any kind of financial assessment of DISCOMs; and ii) there are significant discrepancies in detail, terminology and accuracy of subsidy information in various regulatory documents filed by the DISCOMs.
As the following chart shows, with the exception of Karnataka, grid tariffs have stayed broadly flat or even declined in most states over the last five years.
Figure: Grid tariffs over last five years, INR/ kWh
Source: BRIDGE TO INDIA research, state tariff orders
Note: Figures shown represent energy charge only. Electricity duty, cess and other surcharges including fuel adjustment surcharge are excluded.
The Ministry of Power has been talking up sector reform in recent months. Various ideas have been mooted including UDAY 2, revised National Tariff Policy and amendments to Electricity Act to make DISCOMs financially sustainable. But there is little actual progress. While these long-term measures are deliberated and implemented, the government needs to bite the bullet and effect meaningful tariff hikes across consumer categories to avoid the crisis spiralling out.
For RE, a substantive grid tariff hike would be beneficial in many ways. Besides reducing offtake risk, it would spur power demand from DISCOMs, and result in better prospects for open access and rooftop solar markets.
