Power sector stress building up from well before Covid-19

Discoms’ over dues to gencos for the power supplied has risen to ₹ 1.19 lakh crore as of June. This is significantly higher than the dues in the June-end month of previous years. But it is to be noted that the Genco-Discom dues were abnormally closer to ₹ one lakh crore in earlier months of 2020 too.

The overdue in January itself stood at ₹ 95,813 crore.

This means that the stress in the sector has just been aggravated by Covid-19 lockdowns, and not caused just by it. As of June-end, discoms across the country owe ₹ 1,09,804.22 crore to conventional gencos (predominantly thermal power plants) and ₹ 10,111.44 crore to non-conventional or renewable energy power generation companies.

The general argument given for this is that Covid-19 has led to a slump in billing and therefore discoms are not able to make payments to Gencos. The first Covid-19 lockdown was imposed on March 23, 2020. These lockdowns were extended and had brought industrial activity to a halt in the country.

Responding to queries on the reason for this underlying stress in the system, Vivek Sharma, Senior Director, CRISIL Infrastructure Advisory said, “Underlying stress in the system is on account of the gap between cost of supply (ACS) and average revenue (ARR). The ACS-ARR gap stood at ₹ 0.41 a unit as on March as per Ujwal Discom Assurance Yojana (UDAY) portal for discoms leading to continuous under-recovery.”

“This is mainly on account of inadequate tariff hikes, higher techno-commercial losses (around 18.87 per cent as on March as per UDAY portal) due to poor billing and collection efficiency (significant pending dues towards State government departments) and delayed subsidy disbursal by State governments in lieu of subsidised power supply to domestic and agricultural consumers,” Sharma said.

Under the UDAY scheme in 2015, there was a debt takeover by the State governments, aimed at improving operational efficiencies of discoms and reducing cost of power purchase.

Sabyasachi Majumdar, Senior Vice President at ICRA Limited said, “The progress under UDAY remained less-than-satisfactory with many of the State Discoms not being able to meet the targets set for distribution losses along with the delay in the issuance of tariff orders. The gap between the average tariff realised and the average cost of supply persisted and further increased in financial year 2018-2019 over financial year 2017-2018. This led to a sharp increase in the loss levels for Discoms to ₹ 49,600 crore in fiscal 2018-2019 from ₹ 29,600 crore in fiscal 2017-2018. Further, the debt level for the Discoms at the all India level crossed the pre-UDAY level.”

According to Sharma, the sustained difference between power purchase costs by discoms and sale price to consumers has just made things worse. “Power purchase costs account for around 80 per cent of total cost of supply by discoms. As discoms are continuously making losses over the years, they are not able to pay their creditors for power purchase on time leading to pile up of payables. Ineffective implementation of payment security mechanisms available as per Power Purchase Agreement (PPA) has led to discoms delaying payments to Gencos,” he said.

The Covid-19 pandemic and lockdowns further aggravated the situation. “The lockdown imposed to control the Covid-19 pandemic has adversely impacted the electricity demand in the country and in turn the revenues and cash collections for the discoms. Further, the bulk of the consumption decline has come from the high tariff paying industrial and commercial consumers and there were delays in cash collections from other consumer segments. The consequent revenue gap for the discoms at all India level is estimated to increase by about ₹ 42,000 crore to ₹ 45,000 crore in fiscal 2020-2021,” Majumdar said.