Retiring old thermal power is first hurdle in reducing discom debt of over ₹4.78-lakh crore: Study

Highlighting concerns of mounting debt of power distribution companies in the country, the IEEFA has suggested that a way forward could be to retire old thermal power plants, besides other measures.

The Institute for Energy Economics and Financial Analysis (IEEFA) in its report ‘Curious Case of India’s Discoms: How Renewable Energy Could Reduce Their Financial Distress’, highlights issues and suggests the way forward.

The report by IEEFA has made recommendations to reduce the financial and operational inefficiencies across India’s power distribution sector, which as of May 2020 had accumulated overdue payment liabilities of ₹116,340 crore to generation companies, while already carrying a total outstanding debt of ₹4.78-lakh crore in FY2018-/19.

Vibhuti Garg and Kashish Shah from the IEEFA, in the report recommend, among other strategies, that discoms work with state governments to retire their old, inefficient and expensive thermal power plants as a key pathway to reducing their average cost of power procurement.

“We suggest state-based discoms sit down with state generation utilities and review the old thermal power plants they can retire, given the state of surplus capacity,” says Garg.

“Many thermal power stations are old and operating at well under half their capacity; yet the states are bound by contracts to continue to pay hefty capacity charges.

“We understand that retiring power plants won’t be easy as the proponents will want to make money for the life of the contract period. But in order to move forward and start reducing the massive discom debt, while enabling the states and the nation to transition to a cleaner, cheaper energy economy, the states will have to jump this hurdle,” Garg says.

By taking steps to retire end-of-life, expensive, legacy thermal power contracts, states will reduce their losses and be in a better position to contract cleaner, cheaper renewable power and invest in new technologies, such as smart meters, to further reduce losses.

Discoms have been unable to improve their operational performance even after receiving multiple bailout packages from the government in the last decade.

While there is no silver bullet to improve discoms’ financial sustainability and viability, the report analyses case studies of three states — Maharashtra, Rajasthan, and Madhya Pradesh, while also focusing on actions the Government of India could take to reduce discoms’ financial burden. One of these steps is to resolve legacy contract issues and close inefficient plants, which will result in significant savings from fixed charge payments while reducing pollution and carbon footprint.

Another initiative could be to reduce cross-subsidies to decrease the burden on C&I customers and to increase healthy competition while allowing for the implementation of Direct Benefit Transfers (DBTs), solar irrigation pumps, and adoption of policies favouring the uptake of solar rooftop systems.

A third move would be to reduce unsustainably high AT&C losses through digitalisation, including progressively installing smart and prepaid meters. This will help discoms manage their load better, while reducing metering and billing losses and theft.

The last move would be to revise tariffs annually. This will allow discoms to keep up with inflation.

Increasing private competition will encourage companies supplying electricity, generators, and distributors to develop technologies to increase efficiency, cut costs, and make supply more reliable. Privatisation of some profitable regional franchises could provide capital infusion to reduce state discoms’ footprint and debt levels, while lending more focus on resolving the long tail of the most heavily loss-making regions.

Moving to a National Pool Market will optimise generation nationally as the best return from the huge investment in the national generation fleet, while progressively squeezing out the highest cost suppliers and incentivising the entry of new low-cost generation (at tariffs less than half of some of the legal thermal generators).

Implementing a new tariff structure, with indexation for renewable energy tariffs with developers bidding for levelised tariffs, will allow inflation indexation over the length of the contract, thus lowering solar and wind tariffs in the first five years of operation by 10-20 per cent, and accelerating uptake and thereby displacing expensive and obsolete thermal capacity.

“There is no point in bailing out state discoms again and again without locking in a systemic improvement,” says Shah.

“Absent a sustained resolution of the discom sector losses, India’s overall power sector reforms will be stilted and ineffective. The Government of India should consider implementing these recommendations, and if state governments’ lending and guarantees and discom subsidies are still required, they should be tied to the performance of the states in implementing reform in their distribution sectors,” the report says.

“The extreme financial mess in the distribution sector is unsustainable and requires bold policy choices and government expenditure to create an economically sustainable national electricity system. New private competition can bring new capital and more innovation,” says Garg.

It says that the central government should also prioritise a green stimulus to recover the economic growth smothered by Covid-19. Such growth coupled with the reform measures proposed could help pull out the distribution companies from their current predicament.

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