India's Struggling Power Sector: A Desperate Need for Key Reforms

In an unprecedented move, the Power System Operation Corp. (POSOCO) has barred 27 power distribution companies (discoms) from buying electricity from power exchanges to meet their short-term requirements. In a letter to the exchanges on August 19, POSOCO invoked the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022, after utilities in 13 states failed to clear Rs 5,085 crore in dues owed to the electricity generating companies (gencos).

“Thereafter, 11 states have paid. Discoms of two states are still cut off from the exchanges. And if they don’t pay up, their long-term access will get reduced by 10 per cent every month,” Power Minister R.K. Singh told BT recently. Experts feel the move will force discoms to exercise better fiscal discipline. “The surcharge rule is aimed at bringing financial discipline in payments by discoms,” says Rimali Batra, Associate Partner at DSK Legal, a law firm. While critics claim that the invocation of the clause amounts to the government implementing the provisions of the rules via the back door, the suspension has put the spotlight back on structural reforms required in the sector. Incidentally, the total amount owed by discoms to gencos has risen by 4 per cent a year to Rs 1,32,432 crore in June 2022, as per Ministry of Power data.

“The distribution segment has been reeling under heavy losses and legacy debt estimated at Rs 4.7 lakh crore for the top 10 states, a CRISIL Research report shows. This has not been solved by the short-term liquidity plans rolled out by the government,” says Hetal Gandhi, Director of CRISIL Research. In light of these developments, the government tabled the Electricity (Amendment) Bill, 2022, on August 8. But the perception that more powers may get delegated to the central government has created a flashpoint. The other issue is the prospect of new players focussing on profitable areas with high commercial and industrial loads.

This has led to protests by the opposition parties, farmers and the All India Power Engineers Federation, following which the government has sent the Bill for review to the Parliamentary Standing Committee on Energy. So, why is the Bill necessary?

It allows multiple discoms to operate in the same area. Other proposals are about revision of electricity rates, power purchase agreements, dispute resolution and meeting renewable purchase obligations.

“Given that distribution is the wallet for the power value chain, there cannot be a more opportune time to bring reforms in the sector,” says Agnimitra Kar, Associate Director at CareEdge, a ratings agency.

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