What is Fuelling Power Sector Losses?

Tanvi Vipra - May 10, 2024

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

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.

States and State Legislatures

Uttarakhand Assembly concludes 2-day session; 13 Bills introduced and passed

Tanvi Vipra - Dec 6, 2022

The Uttarakhand Assembly concluded a two-day session on November 30, 2022. The session was scheduled to be held over five days. In this post we look at the legislative business that was carried out in the Assembly, and the state of state legislatures.

13 Bills were introduced and passed within two days

As per the Session Agenda, a total of 19 Bills were listed for introduction in the span of two days. 13 of these were listed to be discussed and passed on the second day. These included the Uttarakhand Protection of Freedom of Religion (Amendment) Bill, 2022, University of Petroleum and Energy Studies (Amendment), Bill, 2022, and the Uttarakhand Anti-Littering and Anti-Spitting (Amendment) Bill, 2022.

The Assembly had proposed to discuss and pass each Bill (barring two) within five minutes (see Figure 1). Two Bills were allocated 20 minutes each for discussion and passing - the Haridwar Universities Bill, 2022, and the Public Service (Horizontal Reservation for Women) Bill, 2022. As per news reports, the Assembly passed all 13 Bills within these two days (this excludes the Appropriation Bills). This raises the question on the amount of scrutiny that these Bills were subject to, and the quality of such laws when the legislature intends to pass them within mere minutes.

Figure 1: Excerpt of Uttarakhand Assembly's November 2022 Session Agenda

Law making requires deliberation, scrutiny

Our law-making institutions have several tools at their disposal to ensure that before a law is passed, it has been examined thoroughly on various aspects such as constitutionality, clarity, financial and technical capacity of the state to implement provisions, among others. The Ministry/Department piloting a Bill could share a draft of the Bill for public feedback (pre-legislative scrutiny). While Bills get introduced, members may raise issues on constitutionality of the proposed law. Once introduced, Bills could be sent to legislative committees for greater scrutiny. This allows legislators to deliberate upon individual provisions in depth, understand if there may be constitutional challenges or other issues with any provision. This also allows experts and affected stakeholders to weigh in on the provisions, highlight issues, and help strengthen the law.

However, when Bills are introduced and passed within mere minutes, it barely gives legislators the time to go through the provisions and mull over implications, issues, or ways to improve the law for affected parties. It also raises the question of what the intention of the legislature is when passing laws in a hurry without any discussion. Often, such poorly thought laws are also challenged in Courts.

For instance, the Uttarakhand Assembly passed the Uttarakhand Freedom of Religion (Amendment) Bill, 2022 in this session (five minutes had been allocated for the discussion and passing of the Bill). The 2022 Bill amends the 2018 Act which prohibits forceful religious conversions, and provides that conversion through allurement or marriage will be unlawful. The Bill has provisions such as requiring an additional notice to be sent to the District Magistrate (DM) for a conversion, and that reconversion to one’s immediate previous religion will not be considered a conversion. Some of these provisions seem similar to other laws that were passed by states and have been struck down by or have been challenged in Courts. For example, the Madhya Pradesh High Court while examining the Madhya Pradesh Freedom of Religion Act, 2021 noted that providing a notice to the DM for a conversion of religion violates the right to privacy as the right includes the right to remain silent. It extends that understanding to the right to decide on one’s faith. The Himachal Pradesh Freedom of Religion Act, 2006 exempted people who reconvert to their original religion from giving a public notice of such conversion. The Himachal Pradesh High Court had struck down this provision as discriminatory and violative of the right to equality. The Court also noted that the right to change one’s belief cannot be taken away for maintaining public order.

Uttarakhand MLAs may not have had an opportunity to think about how issues flagged by Courts may be addressed in a law that regulates religious conversions.

Most other state Assemblies also pass Bills without adequate scrutiny

In 2021 44% states passed Bills on the day it was introduced or on the next day. Between January 2018 and September 2022, the Gujarat Assembly introduced 92 Bills (excluding Appropriation Bills). 91 of these were passed in the same day as their introduction. In the 2022 Monsoon Session, the Goa Assembly passed 28 Bills in the span of two days. This is in addition to discussion and voting on budgetary allocation to various government departments.

Figure 2: Time taken by state legislatures to pass Bills in 2021

Note: The chart above does not include Arunachal Pradesh and Sikkim. A Bill is considered passed within a day if it was passed on the day of introduction or on the next day. For states with bicameral legislatures, bills have to be passed in both Houses. This has been taken into account in the above chart for five states having Legislative Councils, except Bihar (information was not available for Council).
Sources: Assembly websites, E-Gazette of various states and Right to Information requests; PRS.

Occasionally, the time actually spent deliberating upon a Bill is lesser than the allocated time. This may be due to disruptions in the House. The Himachal Pradesh Assembly provides data on the time actually spent discussing Bills. For example, in the August 2022 Session, it spent an average of 12 minutes to discuss and pass 10 Bills. However, the Uttarakhand Assembly allocated only five minutes to discuss each Bill in its November 2022 Session. This indicates the lack of intent of certain state legislatures to improve their functioning.

In the case of Parliament, a significant portion of scrutiny is also carried out by the Department Related Standing Committees, even when Parliament is not in session. In the 14^th Lok Sabha (LS), 60% of the Bills introduced were sent to Committees for detailed examination, and in the 15^th LS, 71% were sent. These figures have reduced recently – in the 16^th LS 27% of the Bills were sent to Committees, and so far in the 17^th LS, 13% have been sent. However, across states, sending Bills to Committees for detailed examination is often the exception than the norm. In 2021, less than 10% of the Bills were sent to Committees. None of the Bills passed by the Uttarakhand Assembly had been examined by a committee. States that are an exception here include Kerala which has 14 subject Committees, and Bills are regularly sent to these for examination. However, these Committees are headed by their respective Ministers, which reduces the scope of independent scrutiny that may be undertaken.

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What is Fuelling Power Sector Losses?

Uttarakhand Assembly concludes 2-day session; 13 Bills introduced and passed

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