Centre’s shock therapy to state discoms is a ‘rabbit-out-of-the-hat’ moment for power sector

The decision by the Union government to ban state discoms from power exchanges has raised a lot of eyebrows. Was it necessary?

ByVivek A

Published Aug 20, 2022 | 3:52 PM Updated Aug 20, 2022 | 4:45 PM

Power lines in Tamil Nadu

The recent action by India’s National Load Dispatch Centre to bar power distribution companies (discoms) of 13 states and Union territories from accessing power exchanges set the cat among the pigeons.

This includes four southern states — Andhra Pradesh, Karnataka, Tamil Nadu, and Telangana. The fear is that these states will see dark days as the lights will go off. This is only partially correct.

This action taken under rules notified in June 2022 is merely barring access to the power exchanges used by state discoms to serve short-term surges in power demand. There is no ban yet on using long-term contracted power to serve the needs of the consumers.

As of 17 August, the four southern states owed power generators around ₹3,075 crore in pending dues, which came down to around ₹488.4 crore on 18 August.

Andhra Pradesh had no dues pending, but it was still included in the ban. This was also pointed out by an official from the state, who attributed this action to lack of communication.

Power sector dues of Andhra, Telangana, Tamil Nadu and Karnataka before and after the power ban by the Centre


State government-owned discoms the main culprit

Predictably, as some of the states paid up, the ban on accessing power exchanges was lifted, including for the Karnataka and Telangana discoms.

The four southern states are facing the current predicament because of long-pending issues plaguing India’s power sector, of which the main culprit is state government-owned discoms. After seeing two schemes to bail out discoms fail, the Union government seems ready to bite the bullet and institute discipline.

How did we get here?

The power sector in India has one main weak link — power distribution companies. In most Indian states, these are run by state government-controlled companies, which are also referred to as discoms. Discoms deliver power to every home or establishment, and bill them for the usage.

The current incumbents at the Centre brought in the UDAY scheme in 2015 to rid the power sector of its ills. This scheme was meant to improve the efficiency of collection of bills, reduce loss of power during transmission, and reduce the difference between the cost of power sourcing and revenue collected from users. As is wont with any scheme aimed at improving the health of the state discoms, this too failed as overdue payments to power generators spiralled again.

Problem plagues power sector despite many bailout schemes

Power distribution lines, a representative image

Tamil Nadu has always had large overdue bills. The fact that states like TN haven’t even separated the power generation operations from distribution shows any reform is fraught with political risk (Prasanna RS/South First)

Then came the emergency liquidity scheme in May 2020 during the pandemic worth up to ₹90,000 crore to help clear pending overdue payments to power generators. Still, the pending overdue payments to power generators continued to stay above ₹1 lakh crore. This necessitated another scheme that would convert these overdue bills to power generators in equated monthly instalments over a period of up to 48 months.

After over two decades of bailing out state discoms, through financial entities controlled by it, the Centre seems to be ready to crack the whip. The late payment rules notified in June 2022 were a part of this.

One thing to note here is that Tamil Nadu is one state that has always had large overdue bills to power generators. It has also not undertaken one of the key reforms of separating power generation operations and distribution operations of its state’s erstwhile electricity board into two different entities. This was one of the reforms proposed in the Electricity Act of 2003.

Controversial new Electricity Bill in Parliament can help

The Centre has been toying with the idea of private participation in the discoms space for a while. Its new Electricity Bill, which is now being reviewed by a Parliamentary Standing Committee, is the fruition of these efforts. The Bill was sent to the committee as there were protests by the opposition parties and unions of power sector employees against the drastic changes proposed in it.

One of the key suggestions of the Bill is the separation of the carriage and content in the distribution of power to consumers. This means the billing and recovery will be done by a different company than the one that lays the power lines till the doors of the consumer. Essentially, the owner of the power lines will not have the monopoly of collecting revenue from consumers, according to the bill.

This could lead to the consumer having the choice of choosing the supplier that provides the most reliable power. The thought behind this proposal is to create competition in each power supply area to improve the availability and reliability of power for consumers.

Power reforms fraught with political risk

This, among other proposals, led to the protests which pushed the Bill to the Standing Committee for review. Although consumers might benefit from the increased competition — one has to only look at Mumbai’s experiment with private discoms for confirmation — such drastic changes aren’t easy.

The fact that states like Tamil Nadu haven’t even separated the power generation operations from distribution shows any reform in the sector is fraught with political risk. That’s why the large-scale shock therapy of banning states from power exchanges raised a lot of eyebrows. This is despite the fact that such actions were taken in the past in a limited way.

Still, one can only hope that the festering issues with the power sector’s main lynchpin — discoms — is fixed once and for all. It is too important a part of the entire power sector’s value chain to continue to remain a problem even after two decades and multiple bailout schemes.