India’s power distribution companies (discoms) remain trapped in a cycle of mounting losses. Can the government’s latest ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD) aims to curb inefficiencies and improve their financial health

The power distribution companies (discoms) stand at the core of the power supply and distribution network in the country. Mostly owned and controlled by State Governments, they buy electricity from the generating companies (gencos) and supply it to the consumers. Yet, invariably, the financial health of discoms has been a matter of serious concern.

According to a report by the Lok Sabha’s Standing Committee, the accumulated losses of discoms increased from Rs 545,000 Crores in financial year (FY) 2020-21 to Rs 584,000 Crores in 2021-22, Rs 647,000 Crores in 2022-23 to Rs 692,000 Crores in 2023-24. The government has sought to address these losses under a ‘Reforms-Linked, Result-Based Scheme for Distribution’ (RLRBSD). The Scheme was unveiled by Finance Minister Nirmala Sitharaman in her Budget speech for FY 2021-22.

Involving an outlay of Rs 300,000 Crore for five years (FY 2021-22 to FY 2025-26), the RLRBSD was aimed at trimming discus Aggregate Technical and Commercial (AT&C) losses to pan-India levels to 12-15 per cent and gradually narrow the ACS-ARR gap (ACS stands for an average cost of purchase, transmission and distribution of electricity whereas ARR stands for the average revenue realized from its sale) by March 2026.

It has two components: (i) providing financial support for compulsory prepaid and smart metering to be implemented across the power supply chain, including in about 220 Million households and up-gradation and strengthening of the distribution infrastructure (ii) training and capacity building.

As reported in the Standing Committee, the Ministry of Power (MoP) has sought an extension of the Scheme by two years through FY 2027-28 to complete the envisaged targets.

Can the scheme deliver?

Before answering this question, we need to analyze the fundamental causes behind discos losses. AT and C losses are a sophisticated nomenclature for leakage from the system or power theft. During FY 2015-16, these were 20.7 per cent. When, out of say 100 units of electricity that leave the generating stations or power dispatch centre, 20.7 units are stolen and hence not paid for, this is bound to have a debilitating effect on the discus operations.

The discoms could charge more on the sale of the balance 79.3 units to compensate for the ‘nil’ revenue on the 20.7 stolen units. But this is theoretical. So, the discoms would end up making a loss to the extent of revenue lost on stolen units. There is another potent factor that exacerbates their losses.

The Electricity Act (2003) and the Guidelines issued by the MoP require the discoms to fix the electricity tariff supplied to consumers in a manner such that the ARR from its sale is equal to the ACS.

Yet under diktat from the State Government, either they don’t bill certain households (HHs) at all (on consumption up to 200 or 300 units a month in Delhi or Punjab) or give a flat subsidy of Rs 800 on monthly consumption (between 201 and 400 units a month in Delhi), besides free supply to farmers as in Punjab.

The discoms seek to make up for the resulting under-recoveries by charging more from industries and businesses for which the tariff can go up to a high of Rs 16 per unit as in Delhi (there being no more than two-three discoms in any jurisdiction hence an oligopolistic situation, they have no option but to pay). Moreover, the States not fully compensating discoms for the under-recoveries, despite making loud promises, further adds to the discom losses.

The twin problems of AT and C losses and under-recoveries on sale to HHs or farmers have existed for close to a quarter century. Since the beginning of 2000, the Centre has come up with four financial restructuring packages (FRPs) to help discoms.

While, the first two (2002, 2012) merely sought to condone their losses, the third namely the Ujwal DISCOM Assurance Yojana (UDAY) launched in November 2015 required discoms to set their house in order and achieve certain milestones in exchange for financial assistance.

Under UDAY, discoms’ mammoth debt of about Rs 400,000 Crore was condoned. Instead of this, they were required to reduce AT and C losses from 20.7 per cent during FY 2015-16 to 15 per cent by FY 2018-19. Further, they were to reduce the ACS-ARR gap from Rs 0.59 per unit of electricity during FY 2015-16 to ‘zero’ by FY 2018-19. But, the discoms failed to deliver.

During FY 2019-20, AT&C losses were 18.9 per cent against the 15 per cent target for FY 2018-19. The ACS-ARR gap during FY 2019-20 stood at Rs 0.42 per unit against a target of ‘zero’ for FY 2018-19. During FY 2020-21, AT and C losses zoomed to 22.3 per cent and the ACS-ARR gap scaled up to Rs 0.69 paise per unit. In the following years, despite some improvement, the AT and C losses still stood at a high of 16.87 per cent during FY 2023-24. No wonder, discoms were grappling with cumulative loss of Rs 692,000 Crore in FY 2023-24.

The RLRBSD launched in FY 2021-22 talks of lowering AT&C losses to 12-15 per cent by the end of FY 2025-26, a level that should have been reached in FY 2018-19. As for the ACS-ARR gap, it merely talks of ‘gradually narrowing’ the gap forgetting the ‘zero’ target that UDAY sought to achieve by FY 2018-19. Now, the MoP has shifted the goalpost to the end of FY 2027-28.     

The Scheme seeks to address discoms losses by up-grading the distribution infrastructure, prepaid and smart metering, training and capacity building and so on. Out of Rs 300,000 Crore outlay proposed for implementing it, the Centre was to provide gross budgetary support (GBS) of close to Rs 100,000 Crore and funding by Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) under irrevocable State Government guarantee. The fund’s release is subject to discoms meeting the pre-qualifying criteria and achieving the basic minimum benchmark in reforms.

As for the follow-up action, in reply to a question in Parliament given by then Power Minister RK Singh in December 2023: “Till today, detailed project reports (DPRs) having totaa l outlay of Rs 120,000 Crore has been approved for loss reduction works and Rs 130,000 Crore for smart metering works.” Further, as of January 2024, the total loan disbursed by PFC-REC was Rs 112,000 Crore for 16 States, against the sanctioned amount of Rs 133,000 Crore.

As for the GBS, the release of funds by the Centre during FY 2023-24 was a mere Rs 6,000 Crore against the budget allocation of Rs 12,000 Crore.

During FY 2024-25, as of February 10, 2025, 96 per cent of the Rs 12,665 Crore allocated for the scheme was utilised as per the revised estimates for 2024-25. So, the money spent (GBS plus loans from PFC-REC) has been less than half of the intended outlay. But, more worrisome is the outcome.

Till last year, ‘against the sanctioned smart meters of around 220 Million, only about 0.8 Million had been installed’. During the current FY, till February 10, 2025, 20.8 million smart meters have been installed.

That takes the total to 21.6 million. This is less than 10 per cent of the target.   The scheme merely addresses the ‘technical’ side of the problem. It barely touches the fringe. The real problem has to do with free or heavily subsidised power and theft assured or facilitated by the political brass just to win elections. For this, it rides piggyback on discoms. Till this is addressed, discoms will continue to remain under serious financial stress.     

(The writer is a policy analyst. Views expressed are personal)