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Revamped distribution reform scheme released

Government has released the draft guidelines of the ‘Revamped, Reforms-Based and Results-Linked Distribution Sector Scheme’ for supporting discoms to undertake reforms and improve performance in a time-bound manner, as announced during the recent Budget.

It is aimed at providing 24x7 uninterrupted, quality, reliable and affordable power supply and seeks to improve discoms’ operational efficiencies and financial sustainability. Total outlay for the scheme is estimated at Rs3,038bn over FY22-FY26. The scheme is positive for all players across the power sector value chain. We believe this is a precursor to ‘perform or perish’ for inefficient discoms.

It is implicit that those discoms that are not able to reform and plug losses, will have to give way to privatisation (delicensing is proposed in the draft Electricity Amendment Bill), as states too don’t have the fiscal space to keep funding power sector losses. Also, as demand increases and short-term power prices inch up, the need to reform has increased. We believe this move will rerate the sector (entire value chain), revive capex (especially in distribution) and improve working capital (positive for gencos).

* Important highlights of the new scheme:

* The scheme has two parts. Part A has two components: i) implementation of 250mn prepaid smart meters by Mar'25; and ii) strengthening the distribution infrastructure. Part B is focused on training, capacity-building and other enabling and supporting activities.

* For smart metering, discoms will tie up with implementing agencies. Central government grant for consumer smart prepaid meters will be a maximum of 15% of project cost (up to Rs900/meter) and claimed for every 5% meters commissioned. Focus is on end-to-end AMI creation and eliminating human intervention.

* Infrastructure strengthening program focuses on feeder separation, and cabling and system upgrade aimed at lowering AT&C losses. Grants will be released after signing of tripartite agreement among the discom, state and Centre, at approved lossreduction trajectories.

* Discoms will receive grants in March of every year and will be conditional to achieving the milestones agreed for the previous fiscal, reviewed through the Results Evaluation Framework. In case a discom is found ineligible in any year, the funding gap will have to be met by the discom or its state government.

* Proposed grant flow – 10% as advance in first year post DPR Part-I approval, 20% in second year, 30% in third, and 40% in fourth year, starting FY22.

* Discoms will be mandated to publish audited annual and quarterly accounts in time, file tariff orders, collect dues from government departments, ensure no new regulatory assets creation and no outstanding subsidy receivables, among other requirements.

* UDAY not a complete failure – laid foundations for the new scheme: As against the popular opinion and despite losses not being near the anticipated levels, UDAY worked well on several fronts. AT&C losses and annual losses reduced to 22% and Rs496bn in FY19 vs FY15 levels of 25.7% and Rs550bn respectively. Further, over FY15-FY19, generation/unit increased by 27%, income (on subsidy-received basis) of discoms increased 18% (from Rs5.97/kWh to Rs7.03/kWh), while losses declined by 28% (from Rs0.72/kWh to Rs0.52/kWh). Another significant achievement of UDAY was data collection and centralisation, which has immensely helped structure the new scheme.

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