The Discom distress

Shubhaansh Kumar

As per the Business Standard, the dues of state-owned discoms to gencos have touched Rs 1.19 trillion. Adding to that, most of the dues are to private gencos and the share of dues to renewable gencos is also, on the rise. The due to government-owned gencos such as NTPC and NHPC has increased by almost 25%. There is also an increasing number of dues that are owed to the CIL (Coal India limited). The biggest state defaulters are Tamil Nadu, Maharashtra, and Uttar Pradesh, with the combined dues to gencos and CIL at Rs 47,842 crores and Rs 3500 crore, respectively.

With increasing dues and no signs of lowering costs of the factor inputs, there does not seem to be any relief to the discoms soon. For all of India’s ambitions and plans to be a 5 trillion $ economy, the buck stops at the state of discoms. During COVID-19, the government announced a Rs 20-lakh crore stimulus package, of which Rs 90,000 crores (later upped to Rs 1,25,000 crores) were to be allotted to the discoms.

Much of the problem arises due to two questions that need to be answered:

1.      Is electricity a social welfare necessity and thus, needs to be sold at subsidized rates?

2.     Is electricity a commodity and thus, should follow the principles of the free market?

But before figuring out these questions, we need to ask, why do discoms not pay on time.

To understand the loss-making business of discoms, we need to look at their supply cost and subsidy structure. Let us assume that the discom’s supply cost for 1 KwH is Rs 5. Since the discoms supply electricity at a cheaper rate and make up the rest of the amount in subsidies, they would sell this 1 KwH of electricity to the consumers for Rs 3. The subsidies, when availed, should net them a profit of Rs 1 per kWh of electricity. Now, what we fail to account for are the negative externalities. The revenue earned per KwH drops due to losses during power transmissions, unbilled (theft) power, and unpaid bills. These negative externalities and the lack of adequate subsidies to make up for the losses, birth loss-making discoms.

 To make up for the falling revenue, the discoms raise loans at relatively high interest rates and purchase short-term agreements. The short-term agreements cause the electricity prices to increase, following the law of economies of scale. The other option that discoms opt for is electricity rationing wherein they deliberately sell less electricity. This phenomenon is otherwise known as, load shedding. While load shedding is in part due to a lack of domestic coal, the underutilization of coal plants and the losses incurred by the discoms are also major factors contributing to it.

Over the years, the discoms have accrued many upstream dues, i.e., it is not only the gencos that the discoms owe money to. There are primarily four reasons why they have not been able to pay their dues:

1.      Tariffs not in line with the costs incurred

2.      About a seventh of the cost structure of discoms is covered through state subsidies

3.      Consumer dues to discoms

4.      Inconsistency of incoming government subsidies

COVID-19 only worsened the situation for discoms. While they were chugging along with increasing dues and subsidies (an unsustainable business model in itself), they were severely impacted by the lockdown. The incoming cash flow was completely shattered by the lockdown. The all-time dip in the electricity demand did not help.

So, the question of whether electricity should be sold at subsidized rates or as a commodity guided by the rules of the free market is the one that needs to be answered. While, yes, electricity is a social welfare necessity, it shouldn’t warrant it to be a right of the people. The beneficiaries of these subsidies range from the daily wage earner to the corporate businessmen. This unequal treatment of subsidies nullifies the whole concept of subsidies. The concept of free and subsidized electricity hurts the discoms, and by effect, the power industry so much, that it has the potential to completely derail the India Growth Story. There needs to be a complete de-coupling of the state and the power industry, all the way from the gencos to the discoms.

Shubhaansh Kumar is a student of BSc (Economics and Analytics) at Lavasa, Pune Campus