India’s state-run distribution companies (discoms) have been a drag on the power sector; their inefficiencies have had a cascading effect, with large unpaid bills for generating companies and poor-quality power supply for consumers. They have been dealt a blow by the Covid-19 lockdown—a massive slump in power demand and a spiral of unpaid bills and accumulated losses. Several states allowed a moratorium to consumers from paying electricity bills (or pay in instalments). Also, scheduled tariff increases have been delayed. The tariff structure does not cover the costs of discoms. Residential and agricultural consumers pay far below the cost of supply; industrial and commercial consumers pay far higher.

While there was expectation of a large-scale government intervention, the government stayed away from direct cash infusions and instead announced a Rs 90,000 crore loan scheme. These loans were to be provided by the two state-owned power sector lenders—REC and PFC—and used by discoms to pay off the dues to generating companies (which, in May 2020, stood at a staggering Rs 97,250 crore).

A set of conditions were to be attached to these ten-year loans. These would have to be guaranteed by state governments; states were required to commit that subsidies owed to discoms would be paid monthly or quarterly, instead of once a year; a second tranche of the loan was to be linked to certain other reforms, such as measurable increase in digital payment interface and having in place detailed action plans to reduce losses related to cost of supplies and revenue collection; among others. Loans were to be secured by receivables of discoms and loan disbursements were to be released directly to generating and transmission companies.

The government soon discovered that several discoms didn’t have headroom to raise funds under the borrowing limits imposed by the Ujwal Discom Assurance Yojana (UDAY), under which they could borrow a maximum of 25% of previous year’s revenues, and hastily moved to relax the limits.

The amount of the loan package was increased to Rs 1,20,000 crore for dues till June. It appears that Rs 70,590 crore has been sanctioned, and Rs 24,472 crore disbursed till September 16. In some cases, states have been unable to provide guarantees required for disbursement of loans, not wishing to burden their already precarious economies. Several discoms have complained that loans are at higher interest rates than they would otherwise get from the market.

The distribution sector needs reforms, including a transparent system of apportion of costs involved in expenses of discoms; developing a robust billing and collection mechanism supply including universal metering of consumers and timely delivery of accurate bills; and targeted subsidies. The amendments to the Electricity Act, 2003, contemplate several reforms to distribution.

But the immediate measures have been, at best, haphazard. Are the various conditionalities that have been attached to the liquidity scheme rational? Do they serve the purpose they were intended to? The most important consideration should have been to stabilise the finances of discoms and ensure financial recovery of power generators. There is little evidence that the funding scheme has done that.

It must be kept in mind that discoms are in a position of disproportionate risk. They prop-up private enterprise by entering into high-cost, long-term power purchase agreements. At the same time, every tariff increase is a political tinderbox.

What is required is an impartial source of liquidity, without the attendant bells and whistles. Unless discoms have sufficient funds to address root issues, they will find themselves in the same position of illiquidity three months down the line, and then premium and interest on these massive loan amounts will need to be paid. At stake is energy access and economic development.

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