by Varshith Devana, Research and Advocacy Lead, and Anshula Tiwari, Research Intern, at the Foundation for Democratic Reforms

We live in a world fueled by electricity. From agricultural farms to households to industries to corporate offices, electricity has now become a basic necessity. Today, economic growth and human development have become entirely dependent on access to electricity. However, India’s per capita electricity consumption, compared to other BRICS countries, is low.¹ Thus, if India aspires to become ‘Viksit Bharat’ by 2047, a substantial increase in electricity consumption is due.

Distribution companies, or DISCOMs, are entities that procure electricity from those who generate it—whether through coal, hydro, solar, wind, etc.—and distribute it to consumers, thus forming a crucial part of the electricity supply chain. As the data from the Power Finance Corporation indicates, these DISCOMs are in dire financial straits in most States.² Notably, most DISCOMs are owned by state governments. However, since the law does not prohibit private DISCOMs, a small number of states allow them to operate.

The state of technical and financial parameters of public sector DISCOMs raises a serious cause for concern. The Aggregate Technical and Commercial (AT&C) losses, an important metric, stands at 16.12% for public sector DISCOMs [see Figure 1]. This means that for every 100 units of electricity distributed, 16 units are ‘lost’ either due to technical issues or remain unbilled or unpaid. A comparison of AT & C losses in select states can be seen in Figure 2 below.

This takes us to the second crucial metric, the ACS-ARR (Average Cost of Supply – Average Revenue Realized) gap, which is the difference between how much a DISCOM pays to buy a unit of electricity and how much it recovers from the consumers by selling that unit. The ACS-ARR gap for public sector DISCOMs is Rs. 0.19 per kWh [see Figure 3]. This means that for every 100 units of electricity supplied to consumers, DISCOMs lose Rs. 19. A comparison of the ACS-ARR gap in select states is depicted in Figure 4 below.

According to the National Institute of Public Finance and Policy (NIPFP), if these accumulated losses were to be met by an increase in tariffs, it would result in tariffs rising by about 20% every year for the next ten years. The main reasons for such financial distress of State-owned DISCOMs are twofold: a lack of metering ³and a lack of investment in upgrading the grid infrastructure. In States with private DISCOMs, we see significantly better performance—these are even profitable! [see Figures 6 and 7 for comparisons between public sector and privately owned DISCOMs].

Additionally, many State governments have programs that provide free or subsidized electricity to farmers. Ideally, the DISCOM has to be reimbursed by the government for the free or subsidized electricity. However, most governments do not pay up on time. Still, the DISCOM must pay the generation companies, leading to losses that accumulate into debt.⁴ Moreover, there is substantially low metering coverage, especially in rural areas. Without metering, energy flows cannot be audited to identify where losses are occurring and infrastructure cannot be properly upgraded. Due to these technical and financial constraints, DISCOMs do not have the space to upgrade the distribution infrastructure. 

This begs the question of what must be done. First, it is important to recognize that, wherever they have been allowed to operate, private DISCOMs have performed very well. Gujarat started this model, and now, private DISCOMs even in other States like Uttar Pradesh, West Bengal and Maharashtra are profitable [see Figure 7 above]. Next, metering is key. Gujarat is the only State where State-owned DISCOMs are profitable [see Figure 7 above]. This was possible because of 100% metering, which allowed regular energy audits and timely upgradation of infrastructure.⁵ Finally, anything free is bound to be misutilized. Hence, providing free electricity to farmers should be remodelled. While it is the State government’s prerogative to provide free electricity, DISCOMs should not bear the financial burden of delayed reimbursements. Ideally, a nominal charge can be levied on the farmers so that there is some disincentive for overuse. The farmer should pay the entire electricity bill to the DISCOM, and the subsidy should be paid to the farmer directly—an easily achievable feat with today’s digital (JAM – Jan Dhan, Aadhar, and Mobile) infrastructure. 

Going forward, the power sector will be one of the most critical pillars of India’s economic growth. Strengthening DISCOMs through universal metering, rational subsidy delivery and increased private participation is essential to building a financially sustainable and efficient electricity ecosystem in the country.

Footnotes

1. According to latest World Bank data, India is at 1,075 kWh per capita, Brazil at 2,916 kWh, South Africa at 3,358 kWh, China at 6,112 kWh, and the United States at 12,645 kWh. ↩︎
2. Report on Performance of Power Utilities 2023. ↩︎
3. According to latest Ministry of Power data, in respect of Distribution Transformer (DT) metering, Gujarat stands in contrast to other States such as Tamil Nadu and Uttar Pradesh with 10% metering each, Madhya Pradesh at 43% metering and Andhra Pradesh at 53% metering. ↩︎
4. PRS India: What is Fuelling Power Sector Losses? ↩︎
5. Supra note 3. ↩︎