Power Distribution Finance: Present Challenges

Power Distribution Finance: Present Challenges

November 23, 2020 Admin
Power Distribution Finance Finance for Power Distribution Finance for Power Distribution Company Finance for power sector companies

The power sector in India is built out of collaborated efforts of the power generation, transmission, and power distribution sectors. The distribution segment of the power sector comprises  Power Distribution companies or Discoms, who are responsible for sourcing and distributing electrical energy to the end-users – domestic, commercial, industrial, etc. This segment of the power sector has continually remained cash strapped and has availed many Power Distribution Finance initiatives of the Govt/banks to revamp its operational and financial sustainability. The outstanding dues that Discoms owed to power generators in Feb 2019 stood at a whopping Rs 418.81 billion. Unsettled dues from customers are the main cause for Discoms not being able to pay off their energy debts to the power generators, besides power theft and transmission losses. This shortfall is generally mitigated by loans, cost optimization, and Power Distribution Finance schemes launched by the govt. 


The Recent Past At a Glance

Central and State Governments in the past had introduced several relief Power Distribution Finance solutions to strengthen the financial and operational health of Discoms. Ujwal Discom Assurance Yojna (UDAY) is one of the recent reform initiatives launched in Nov 2015. The Aggregate Technical and Commercial losses in a few states have yet, not come below the earmarked level of 15% and have rather widened the gap between ARR (Annual Revenue Requirement) and ACoS (Average Cost of Supply). Analysis of UDAY’s results pointed at the fact that heavy subsidization of agricultural power, burdened the High Tension users and that adversely affected timely payment collections from that segment. Discoms continue to remain engulfed in the problems of increasing debt and under-recovery. The UDAY power distribution finance scheme has hence not been a monumental success.

Power Distribution Finance: Present Challenges

Power Distribution Finance: How Do the Present and Future Look Like?

Even though the power sector has remained loss-making for years, yet keeping it seamlessly running is an inevitable requirement. This is because the demand for electrical power is constantly on the rise and India is both a major energy producer and consumer at the same time. Power distribution finance is thus extremely necessary to keep boosting the infrastructural potential of India even in recent times. In the wake of the pandemic, the Indian Government has empowered Power Finance Corp. Ltd and Rural Electrification Corp. Ltd to channelize power distribution finance through an infusion of Rs 90,000 crores in the form of state-guaranteed loans. The lending limits in this Electricity Amendment Act 2020, have been eased too, allowing the corporations to pump power distribution finance, 25% higher than the previous years’ capping set during the UDAY scheme. This time, it is forecasted that the risk of defaults by discoms shall be relatively low since the loans are supported by state guarantees. On the other hand, a financial loss of Rs 50,000 crore by 2021 fiscal yearend is being estimated. The 10-year loan package aims to clear up discom losses incurred till June 2020. The loans are being disbursed in two tranches and shall encourage digital payment interfaces, introduce action plans for loss reduction, and implementing a prepaid metering system in government bodies. Loans disbursed in the first tranche will be based on an irreversible and unconditional guarantee from the respective state governments and shall cover loan principal, interest, and other charges. The second tranche is designed to be conditional upon loss reduction and performance enhancement of the discoms. The state governments in their capacity of guarantors are likely to source this power distribution finance from financial institutions and banks, who will also be useful when discoms avail loans to prepay the relief loan they have taken. In one way or the other, banks and other Financial Institutions have a huge role to play, to make this colossal capital influx a success. The RBI has also directed banks to formulate a crisis plan in case of payment default wherein insolvency proceedings may be initiated against the defaulters. Ample state and central government backing and possible rationalization of tariffs would embolden banks and financial institutions to take part in rescuing the ailing power sector and make power distribution finance schemes successful. 

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