The core dilemma persists: How to prevent debt while ensuring universal electricity access? This issue entails policy intricacies and power sector reforms

In an interview, Union Power Minister RK Singh revealed he has been telling States that electricity is not free. “If any State wants to give free power to any category of people, they can go ahead and do so, but you have to pay for it”.

Singh’s exhortation to the States assumes significance in the backdrop of a spate of announcements by the latter to give free electricity to certain consumers which affect the viability of power distribution companies or discoms (they buy power from generating companies or gencos and supply to the consumers). He argues “like any other commodity, generation and distribution of electricity involves cost and if a State is to provide it for free to a section of consumers, it also needs to have finances to pay the genco. If the genco isn’t paid, electricity will not be produced in the first place”.

But, there can’t be any compromise on the generation of electricity as any shortfall could lead to a stoppage of economic activity. To meet the surge in demand (due to the impending summer), the Union Government has invoked the provisions of the Electricity Act (2003) under Section 11asking gas-based gencos and thermal plants based on imported coal to increase generation even if it entails extra cost. That is the reaction to meeting incremental demand. How could it tolerate massive cuts in generation inevitable when gencos are not paid? So, States must ensure that they are paid.   

When pressurized, the concerned States borrow money to pay the gencos resulting in a debt trap. For instance, in the first two years of the AAP Government, Punjab borrowed as much as Rs 47,000 crore adding to the already high debt of the State.

How can the States avoid debt trap?

The Electricity Act (2003) and the Guidelines issued by the Ministry of Power require the discoms to fix the charge (or tariff) on electricity supplied to consumers in a manner such that the average revenue realization (ARR) from its sale is equal to the average cost of supply (it includes the cost of purchase, transmission and distribution), or ACS. The discoms are free to decide the modalities of how this is to be ensured subject to approval by the concerned State Electricity Regulatory Commissions (SERCs).

Ideally, the discoms should charge from ‘all’ consumers a tariff equal to the total cost of supply say Rs ‘X’ crore divided by the number of units. But, they don’t follow this principle. They charge less from certain consumers especially households (HHs) and farmers.

For instance, in Delhi, the tariff applicable to HHs consuming 200 units a month is Rs 3 per unit which is about half of the ACS. Including a plethora of levies adding to 44.6 per cent, the shortfall comes to Rs 4.3 per unit. For HHs consuming between 201 and 400 units, the tariff is Rs 4.5 per unit implying an under-recovery of Rs 1.5 per unit. Including the levies, this comes to Rs 2.2 per unit.

These under-recoveries are cross-subsidized by charging more from industries and business establishments for which the tariff can go up to a high of Rs 16 per unit. The low tariff charged from the target consumers (read: HHs consuming up to 400 units a month) is nothing but a freebie given by political parties. But, it goes unnoticed as the State exchequer doesn’t have to pay for these under-recoveries. The industries that are made to foot the bill can’t even murmur as discom being the sole supplier of electricity, they have no other option. 

But, political parties don’t want the target HHs to even pay this small tariff. In Delhi, the AAP Government tells discoms not to raise any bill on HHs consuming up to 200 units. Likewise, in Punjab, consumption of up to 300 units a month by an HH is free. This extra under-recovery of Rs 4.3 per unit in Delhi (applicable tariff Rs 3 per unit plus 44.6 per cent levies) has to be reimbursed by the State to the discom. But, most States don’t reimburse or do it partially and after considerable delay. This leads to losses of discoms.

The availability of free power also drives people to manipulate their reported consumption. For instance, in Punjab, an HH consuming 900 units a month, gets three meters installed to keep consumption of each under 300 units thereby ensuring zero bills. Reportedly, more than 100,000 meters have been bifurcated or trifurcated enabling even high-end consumers to avail of the free bonanza. As for farmers who are eligible for free power in the State, they report even consumption for running multiple ACs in their homes under farming head thereby avoiding any payment.  

As a consequence, currently, almost over 95 per cent of power consumers in Punjab avail of subsidies, a major portion of which isn’t even reimbursed to discoms. Discoms’ losses also increase due to AT&C (aggregate technical and commercial) losses - a sophisticated nomenclature for power theft. According to Singh, AT&C’s losses used to be high at 27 per cent. In Punjab, reportedly, an overwhelming share of electricity that leaves the generating stations/power dispatch centres remains unaccounted for.

The discoms have funded these losses by borrowings from banks and other financial institutions (FIs) apart from keeping bills pending. At the end of FY 2021-22, their total debt was Rs 620,000 crore. In June 2022, they owed about Rs 1,40,000 crore to Gencos and transmission companies (transcos).

The Center has taken several measures to force discoms to clear their dues. The late payment surcharge (LPS) Rules, implemented in 2022 made it mandatory for discoms to clear their legacy dues as existing on June 3, 2022, in a time-bound manner in 12 EMIs with the benefit of non-applicability of the LPS after its implementation date. The rules are also provided for time-bound clearance of current dues failing, which will attract a power supply cut. This has resulted in legacy dues decreasing from Rs 1,40,000 crore in June 2022 to around Rs 70,000 crore in July 2023 and further down to Rs 40,000 crore currently.

Under the ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD) launched in July 2021, the Centre has undertaken a massive investment of Rs 300,000 crore to improve the reliability and quality of the power supply and enhance the efficiency of discoms. It has compulsory pre-paid and smart metering components to be implemented across the power supply chain, including in about 250 million households. As a result, AT&C losses decreased from 22.32 per cent during 2020-21 to 13.5 per cent during 2022-23.

However, according to the Minister, today power pilferage is 15 per cent. On this much electricity, discoms get ‘nil’ revenue. On a much larger percentage of power used by target HHs and farmers, the States promise to pay on their behalf. But, they don’t pay in full and whatever payment comes, it is delayed. Even for making payments, the States borrow money. And, the vicious cycle continues.

It won’t end unless discoms are unshackled from State controls and given the freedom to decide their pricing and distribution policies. If, States want certain HHs and farmers to get power free, let them give the money directly to them. This reform will also pave the way for the deregulation of electricity distribution, more options for consumers to source their needs and a reduction in tariffs.

(The writer is a policy analyst; views are personal)