Last week, the Power Finance Corporation reported that state-owned power distribution companies across the country made financial losses amounting to Rs 68,832 crore in 2022-23.  This is four times higher than the losses witnessed in 2021-22, and roughly equivalent to the annual budget of a state like Uttarakhand.   This blog examines some of the causes and implications of such losses.

Overview of financial losses

For several years now, electricity distribution companies (discoms), which are mostly state-owned, have witnessed steep financial losses.  Between 2017-18 and 2022-23, losses accumulated to over three lakh crore rupees.  In 2021-22, discom witnessed substantial reduction in their losses, primarily because states released 1.54 lakh rupees in subsidies to clear pending dues.  State governments provide discoms with subsidies, so that domestic and agricultural consumers receive affordable power.  These payments are typically delayed which creates cash flow constraints, and leads to an accumulation of debt.  In addition, costs incurred by discoms in 2021-22 remained unchanged.

Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21.  Data for Ladakh is available from 2021-22 onwards.  Data for Jammu and Kashmir is not available.  The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.

As of 2022-23, losses have increased again to reach Rs 68,832 crore.   This increase has been driven by rising costs.  At a per unit level, the cost of supplying one kilowatt of electricity rose from 7.6 rupees in 2021-22, to 8.6 rupees in 2022-23 (See Table 1).

Table 1: Financial details of state-owned power distribution companies

Details	2019-20	2020-21	2021-22	2022-23
Average cost of supplying power (ACS)	7.4	7.7	7.6	8.6
Average revenue realised (ARR)	6.8	7.1	7.3	7.8
Per unit loss (ACS-ARR)	0.6	0.6	0.3	0.7
Total losses (in Rs crore)	-60,231	-76,899	-16,579	-68,832

Note: Data from 2020-21 onwards does not include Odisha, and Dadra & Nagar Haveli and Daman and Diu since their distribution function was privatised in 2020-21.  Data for Ladakh is available from 2021-22 onwards.  Data for Jammu and Kashmir is not available.  The Delhi Municipal Council Distribution Utility has been included from 2020-21 onwards.
Sources: Power Finance Corporation reports for various years; PRS.

Purchase of electricity from generation companies (gencos) forms about 70% of a discom’s total costs, and coal is the primary source for generating electricity.  The following chain of events took place in 2022-23: (i) consumer demand for electricity rose by 10% over the previous year, as compared to a 6% year-on-year increase in the past 10 years, (ii) coal had to be imported to meet the increased demand, and (iii) global coal prices were elevated.

Coal imported at elevated prices to keep up with rising electricity demand

In 2022-23, demand for electricity increased by 10% over 2021-22.  Between 2008-09 and 2018-19, demand increased at an annual growth rate (CAGR) of 6%.  Electricity demand grew as the economy grew (at 7%), and largely came from domestic and agricultural consumers.  These consumer categories account for 54% of the total electricity sales, and their demand rose by 7%.

Sources: Central Electricity Regulatory Commission; PRS.

Electricity cannot be stored at scale, which means that generation must be scheduled depending on anticipated demand.  The Central Electricity Authority anticipates annual demand for each year.  It estimated that demand in 2022-23 would be at 1,505 billion units.   However, the actual demand was higher than anticipated in the first few months of 2022-23 (See Figure 3).

To meet this demand, electricity generation had to be ramped up.  Coal stocks had already depleted from 29 million tonnes in June 2021 to eight million tonnes in September 2021, on account of high demand in 2021-22.  To ensure uninterrupted supply of power, the Ministry of Power directed gencos to import coal.  The Ministry noted that without imports, widespread power cuts and blackouts would have occurred.

Sources:  Load Generation Balance Report 2022 and 2023, Central Electricity Authority; PRS.

Coal imports rose by about 27 million tonnes in 2022-23.  While this constituted only 5% of the overall coal used in the sector, the price at which it was imported significantly impacted the sector.  In 2021-22, India imported coal at an average price of Rs 8,300 per tonne.   This rose to Rs 12,500 per tonne in 2022-23, a 51% increase.  Coal was primarily imported from Indonesia, and prices shot up due to the Russia-Ukraine war, and demand surge by countries like India and China.   

Sources: Ministry of Power; Ministry of Statistics and Programme Implementation; PRS.

Coal import situation going forward

In January 2023, the Ministry of Power advised gencos to import 6% of the required coal, to ensure sufficient stock until September 2023.   It noted that due to floods and variable rainfall in various parts of the country, hydro generation capacity reduced by about 14%.   This put additional burden on coal based thermal generation in 2023-24.  Following this, in October 2023, the Ministry directed all gencos to continue using at least 6% imported coal until March 2024.  

Sources: Ministry of Coal; PRS.

Structural issues in the power sector and its impact on state finances

Discoms witness persistent financial losses due to certain structural issues.  Their costs are typically high because of old contracts with generation companies (gencos).  Power purchase costs in these contracts  do not account for production efficiencies over the years, and costs remain unchanged.  Tariffs are only revised every few years, to ensure that consumers are protected from supply chain shocks.  As a result, costs are carried forward for a few years.  In addition, discoms sell electricity to certain consumers such as agricultural and residential consumers, below cost.  This is supposed to primarily be recovered through subsidy grants provided by state governments.  However, states often delay subsidy payments leading to cash flow issues, and accumulation of debt.  In addition, tariff recovery from the power sold is not optimal.  

Losses reported in the generation sector have also increased.  In 2022-23, state-owned gencos reported losses worth Rs 7,175 crore, as compared to the Rs 4,245 crore in 2021-22.  Rajasthan accounted for 87% of these, at Rs 6,278 crore.  Note that under the Late Payment Surcharge Rules, 2022, discoms are required to make upfront payments to gencos.  

Risk to state finances

Persistent financial losses, high debt and guarantees extended by states continue to pose a risk to state finances.  These are contingent liabilities for state governments, i.e., in the event a discom is unable to repay its debt, the state would have to take it over.  

Several such schemes have been introduced in the past to bail discoms out (See Table 2).  As of 2022-23, discoms have an outstanding debt worth Rs 6.61 lakh crore, 2.4% of the national GDP.  Debt is significantly high in states such as Tamil Nadu (6% of GSDP), Rajasthan (6% of GSDP), and Uttar Pradesh (3% of GSDP).  Previous Finance Commissions have recognised that strengthening discom finances is key in minimising the risk to state finances.    

Table 2: Key government schemes for the turnaround of the distribution sector over the years

Year	Scheme	Details
2002	Bailout Package	States take over the debt of state electricity boards worth Rs 35,000 crore, 50% waiver of interest payable by state electricity boards to central PSUs
2012	Financial Restructuring Package	States take over 50% of the outstanding short-term liabilities worth Rs 56,908 crore
2015	Ujwal Discom Assurance Yojana (UDAY)	States take over 75% of the debt of discoms worth Rs 2.3 lakh crore and also provide grants for any future losses
2020	Liquidity Infusion Scheme	Discoms get loans worth Rs 1.35 lakh crore from Power Finance Corporation and REC Limited to settle outstanding dues of generators, state governments provide guarantee
2022	Revamped Distribution Sector Scheme	Central government to provide result-linked financial assistance worth Rs 97,631 crore for strengthening of supply infrastructure

Sources: NITI Aayog, Press Releases of the Ministry of Power; PRS.

For more details on the impact of discom finances on state finances, see here.  For more details on structural issues in the power distribution sector, see here.  
 

ANNEXURE

Table 3: Cost and revenue structure of discoms on energy sold basis (in Rs per kw)

Details	2019-20	2020-21	2021-22	2022-23
Average cost of supplying power (ACS)	7.4	7.7	7.6	8.6
of which
Cost of procuring power	5.8	5.9	5.8	6.6
Average revenue realised (ARR)	6.8	7.1	7.3	7.8
of which
Revenue from sale of power	5.0	4.9	5.1	5.5
Tariff subsidy	1.3	1.4	1.4	1.5
Regulatory income and revenue grant under UDAY	0.3	0.1	0.0	0.2
Per unit loss	0.6	0.6	0.3	0.7
Total financial losses	-60,231	-76,899	-16,579	-68,832

Sources: Power Finance Corporation reports for various years; PRS.

Table 4: State-wise profit/loss of power distribution companies (in Rs crore)

State/UT	2017-18	2018-19	2019-20	2020-21	2021-22	2022-23
Andaman and Nicobar Islands	-605	-645	-678	-757	-86	-76
Andhra Pradesh	-546	-16,831	1,103	-6,894	-2,595	1,211
Arunachal Pradesh	-429	-420	NA	NA	NA	NA
Assam	-259	311	1,141	-107	357	-800
Bihar	-1,872	-1,845	-2,913	-2,966	-2,546	-10
Chandigarh	321	131	59	79	-101	NA
Chhattisgarh	-739	-814	-571	-713	-807	-1,015
Dadra & Nagar Haveli and Daman & Diu	312	-149	-125	NA	NA	NA
Delhi	NA	NA	NA	98	57	-141
Goa	26	-121	-276	78	117	69
Gujarat	426	184	314	429	371	147
Haryana	412	281	331	637	849	975
Himachal Pradesh	-44	132	43	-153	-141	-1,340
Jharkhand	-212	-730	-1,111	-2,556	-1,721	-3,545
Karnataka	-2,439	-4,889	-2,501	-5,382	4,719	-2,414
Kerala	-784	-135	-270	-483	98	-1,022
Ladakh	NA	NA	NA	NA	-11	-57
Lakshadweep	-98	-120	-115	-117	NA	NA
Madhya Pradesh	-5,802	-9,713	-5,034	-9,884	-2,354	1,842
Maharashtra	-3,927	2,549	-5,011	-7,129	-1,147	-19,846
Manipur	-8	-42	-15	-15	-22	-146
Meghalaya	-287	-202	-443	-101	-157	-193
Mizoram	87	-260	-291	-115	-59	-158
Nagaland	-62	-94	-477	-17	24	33
Puducherry	5	-39	-306	-23	84	-131
Punjab	-2,760	363	-975	49	1,680	-1,375
Rajasthan	-11,314	-12,524	-12,277	-5,994	2,374	-2,024
Sikkim	-29	-3	-179	-34	NA	71
Tamil Nadu	-12,541	-17,186	-16,528	-13,066	-9,130	-9,192
Telangana	-6,697	-9,525	-6,966	-6,686	-831	-11,103
Tripura	28	38	-104	-4	-127	-193
Uttar Pradesh	-5,269	-5,902	-3,866	-10,660	-6,498	-15,512
Uttarakhand	-229	-808	-323	-152	-21	-1,224
West Bengal	-871	-1,171	-1,867	-4,261	1,045	-1,663
State Sector	-56,206	-80,179	-60,231	-76,899	-16,579	-68,832
Dadra & Nagar Haveli and Daman & Diu	NA	NA	NA	242	148	104
Delhi	109	657	-975	1,876	521	-76
Gujarat	574	307	612	655	522	627
Odisha	NA	NA	-842	-853	940	746
Maharashtra	NA	590	1,696	-375	360	42
Uttar Pradesh	182	126	172	333	256	212
West Bengal	658	377	379	398	66	-12
Private Sector	1,523	2,057	1,042	2,276	2,813	1,643
All-India	-54,683	-78,122	-59,189	-77,896	-13,766	-67,189

Note: Minus sign (-) indicates loss; Dadra & Nagar Haveli and Daman & Diu discom was privatised on April 1, 2022; New Delhi Municipal Council Distribution utility has been added from 2020-21 onwards. 
Sources: Power Finance Corporation reports for various years; PRS.