Electricity distribution utilities(discoms) are facing difficulties in their operations. The main reason behind this is the disproportionate tariff relative to the cost of electricity supply, which has surpassed the technical aggregate approved by the regulator. According to research firm ICRA, optimizing the cost of buying power is the key to reducing the gap between the cost and revenue for discoms. On the brighter side however, Gujarat is the only state that does not face losses whereas most other state-owned utilities are struggling to survive.

The median-approved power purchase cost (PPC) for FY25 by the state electricity regulators in 13 key states stood at Rs 5.4 per unit against the actual median PPC of Rs 5.7 per unit in FY23. In FY22, it stood at Rs 5.0 per unit. The PPC for FY23 increased across the states and remained higher than approved, driven by increased dependence on imported coal amid elevated global coal prices and a rise in tariffs in the short-term market. While coal prices have moderated from the peak in FY2023, short-term tariffs remain elevated, maintaining upward pressure on PPC. In this context, the discoms’ ability to optimize power procurement through higher sourcing of cheaper renewable power along with storage and reducing dependence on costlier sources remains important.

Commenting on the progress in issuance of tariff orders, Vikram V, Vice President & Co-Group Head – Corporate Ratings, ICRA, said: “The tariff-determination process for state discoms has improved following the General Elections, with 22 of the 28 states issuing the orders for FY2025 as of July 2024 against only 11 states as of May 2024. However, the tariff hikes remain modest with a median rise of 1.7 percent for FY2025, lower than the 2.5 cent approved for FY2024. “

The amount of regulatory assets (RA) for distribution utilities has grown to more than Rs. 2.8 trillion. This amount includes utilities from Tamil Nadu, Uttar Pradesh, and Rajasthan, which account for nearly 70 per cent of the total. Recovering such a massive amount would require more than 5 years. The duration could lead to a significant tariff shock for consumers in these states. Consequently, the State Electricity Regulatory Commissions (SERCs) in these states have yet to identify a way to recover these assets. The commission also admits that state government support is necessary to resolve this issue.

Many reforms are in progress to address the challenges the distribution segment faces. It includes the Revamped Distribution Sector Scheme (RDSS) to reduce AT&C losses. The late payment surcharge (LPS) would reduce dues from utilities to generators. The Fuel and Power Procurement Adjustment Surcharge (FPPAS) will assure the regular pass-through of variations in power purchase costs.

However, there has been mixed progress in implementing FPPAS rules, which were notified by the Ministry of Power, Government of India, in December 2022. Among the nine states—Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu, Telangana, and Uttar Pradesh—that account for over 70% of electricity consumption in the country, the rule has been implemented in only three states, with the remaining six states yet to adopt it.
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Not enough power! Power distribution companies under pressure on lower tariff hike, Gujarat only state with no losses