The credit profile of the state-owned distribution companies (Discoms) continues to remain stressed due to higher level of technical and commercial losses compared to regulatory norms, lower tariffs in relation to their cost of supply and inadequate subsidy support from the respective state governments.

The debt level of discoms have gone up post the implementation of the Centre’s UDAY scheme in FY 2016 and are now estimated at close to ₹6 trillion in FY2022. There has been a build-up in dues to power generators by 30 per cent to ₹1.27 trillion as of December 2020 on a year-on-year basis.

ICRA maintains a negative outlook on the power distribution segment. The credit profile of several privately-owned discoms remains healthy supported by superior operating efficiencies, favourable demographic profile and timely pass-through of cost variations to consumers.

Sabyasachi Majumdar, Group Head & Senior Vice President, Corporate ratings, ICRA, in a statement said, “Such high level of liabilities (debt plus dues to Gencos) is unsustainable for the discoms and in turn for the growth of the power sector as such. The implementation of reforms in the distribution segment is essential which could either be through privatisation or through delicensing as proposed by the government.”

“A strong political will and support from the state governments is required for implementation of such proposals given that power is a concurrent subject. Further, delicensing would require suitable amendments to the Electricity Act as well as requisite policy and regulatory clarity with regard to the division of wires and supply business and tariff determination process for the incumbent and new licensees.”

The announcement of revamped reforms-based scheme announced in the Budget 2021 with an outlay of over ₹3 lakh crore over five years is directionally positive with the intent to improve the viability of state owned discoms. A major part of this outlay is expected to be towards smart meters and upgrading distribution infrastructure.

Girishkumar Kadam, Co-Group Head & Vice President, ICRA Ratings, said, “A 1 per cent reduction in distribution losses would thus lead to savings and hence the reduction in book losses by ₹50 billion per annum on all India basis. The use of distributed solar power projects for supply to agriculture consumers through dedicated agriculture feeder route is estimated to entail significant savings to discoms through reduction in power purchase cost and lower distribution losses, given the highly subsidised nature of power tariffs to agriculture consumers.”

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