Cash Outage

Power discoms stare at a dark future as aggregate losses mount

UDAY (Ujwal DISCOM Assurance Yojana) was seen as the harbinger of the good times for the state-owned, loss-making power distribution companies (or discom) in the country.

In FY16, when the state governments signed memorandum of understanding under the scheme, it was agreed upon that each state discom would initiate structural reforms by reducing AT&C (aggregate technical and commercial) losses by 900 basis points (bps) to about 15% by end of FY19, besides regularly hiking tariffs by 5-6% every year. In lieu, the state governments took over three-fourth of discom debt, helping them reduce the interest cost outgo.

But according to a report by Crisil, while discoms enjoyed the benefit of debt reduction, structural reforms have been slow to come by. For instance, AT&C losses fell by only 400 bps by December 2018, while the average tariff hike was a paltry 3% per annum.

As in the past, Crisil states that leaves the states with two options: take hard decisions to get their discoms back into shape, or prepare for another bailout. In 2016, most states had the fiscal headroom to assume three-fourths of the debt of their discoms, but now, because of deterioration in state finances over the past few years, the latitude is limited. The reason: nine of the 15 states have already breached the Fiscal Responsibility and Budget Management Act cap of 25% debt to gross state domestic product ratio.

A delay in pushing through hard reforms such as aggressive tariff hikes, privatisation, material reduction in AT&C losses through smart metering, would only compound the pain in the sector, especially for the generating companies, investors and lenders, feel Crisil.

The other unintended fallout of the rising debt burden is that it could stall the surge seen in renewable energy (RE) space. Renewable capacity addition has already slowed down in FY19 to 8.6 GW from 11 GW in FY17/18 owing to policy hiccups, bid cancellations and non-banking financial companies’ (NBFCs’) liquidity constraints.

According to report by Edelweiss Financial Services, though favourable economic dynamics (tariff at Rs.2.7/Kwh versus thermal’s Rs.3.15/Kwh) raise hopes of 14 GW average capacity addition over the next three years, besides several other factors, discom’s payment overdue could pose a challenge.

Given the rising peak demand and inability to fall back on alternate sources (gas/hydro) to cater to this demand, Edelweiss believes thermal will continue to play a significant role along with rising RE contribution to the energy mix.

But the big question is with assembly elections due in some states and uncertainty over the make-up of the central government, it’s unlikely that governments will take any harsh measures, especially, increasing tariffs.

That being the case, the mess in the power sector is unlikely to be resolved anytime soon.