In yet another attempt to save loss-making electricity distribution companies (discoms), the Budget has provided for a reforms-based and result-linked scheme, with an outlay of about ₹3.06-lakh crore over five years.

It will assist discoms in infrastructure creation, including providing prepaid smart metering, feeder separation, and upgrading systems, Finance Minister Nirmala Sitharaman.

Reacting to the announcement, “The distribution segment has been the weakest link in the electrical system and providing assistance for infrastructure creation while tying the support to financial improvements is vital for sustainability,” Association of Power Producers (APP) said in a statement.

The new scheme follows not only the Ujwal Discom Assurance Yojana (UDAY) scheme, which ran from 2015 to 2019 and aimed to reduce discoms’ debt levels and losses, but also the ₹90,000 crore liquidity infusion package launched last year to allow the debt-laden discoms to borrow beyond the standard limits in the banking system.

Operational improvement

“The central government this time is targeting operational improvement rather than just financial liquidity,” said Ankur Agarwal, Associate Director, Infrastructure and Project Finance at India Ratings & Research. The disbursal of funds, whether debt or grant, will likely be in tranches based on targets for financial performance, Agarwal said.

Sudhir Kumar, DGM and group head at CARE Ratings said, the new scheme will help discoms improve their operational efficiency and reduce aggregate technical and commercial (AT&C) losses, but those are only one part of the dead weight chained to the discoms, he added.

The other reason most discoms are steeped in losses is the gap between their average cost of supply and average realisable revenue (ACS-ARR).

State governments, which also control most discoms, often subsidise electricity to consumers but delay the release of both the subsidy amount to the discom and even their bill payments for electricity used, Kumar said. This has severely stressed the cash flow of the discoms.

“While the new scheme can mainly address AT&C losses, it can’t address the ACS-ARR gap, except perhaps that prepaid meters might incentivise government buildings to pay their bills on time,” Kumar added.

“The distribution companies across the country are monopolies, either government or private,” Sitharaman said. “A framework will be put in place to give consumers alternatives to choose from among more than one Distribution Company.”

The APP has welcomed this move, saying that “competition in the distribution segment will improve quality of power and bring down retail tariffs.” Competition essentially requires privatisation of distribution business by roping in a private partner using franchisee or a collection agent model, Agarwal said.

“Obviously, the move will face resistance from existing monopolies and this remains the biggest reform for the next decade,” he said.

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