Reduce financial and operational inefficiencies across India’s power distribution sector, which as of May had accumulated massive overdue payment liabilities of Rs 1,16,340 crore to generation companies, by retiring old and expensive thermal power plants, a report by IEEFA said on Thursday.
Written by Vibhuti Garg and Kashish Shah from the Institute for Energy Economics and Financial Analysis (IEEFA), the report recommends, among other strategies, that discoms work with state governments to retire their inefficient and expensive thermal power plants as a key pathway to reducing their average cost of power procurement.
Discoms carry a total outstanding debt of Rs 4,78,000 crore or $66bn in FY2018/19.
“We suggest state-based discoms sit down with state generation utilities and review what old thermal power plants they can retire, given the state of surplus capacity,” Garg told IANS.
“Many thermal power stations are old and operating at well under half their capacity, yet the states are bound by contracts to continue to pay hefty capacity charges.
“We understand that retiring power plants won’t be easy as the proponents will want to make money for the life of the contract period. But in order to move forward and start to reduce the massive discom debt while enabling the states and the nation as a whole to transition to a cleaner, cheaper energy economy, the states will have to jump this hurdle.”
By taking steps to retire end-of-life, expensive legacy thermal power contracts, states will reduce their losses and be in more of a position to contract cleaner, cheaper renewable power and invest in new technologies to further reduce losses such as smart meters.
Discoms have been unable to improve their operational performance even after receiving multiple bailout packages from the government in the last decade.
While there is no silver bullet to improve discoms’ financial sustainability and viability, the report analyses three state-based case studies with respective recommendations on Maharashtra, Rajasthan and Madhya Pradesh, while also focusing on action the government can take now to reduce the discoms’ financial burden.
These include resolving legacy contracts issues and closing inefficient plants which will result in significant savings from fixed charge payments while reducing pollution and carbon footprints.
Also, reducing cross-subsidies to decrease the burden on commercial and industrial customers and increase healthy competition while allowing for the implementation of direct benefit transfers, solar irrigation pumps, and the adoption of policies favouring the uptake of solar rooftop systems.
“There is no point in bailing out state discoms again and again without locking in a systemic improvement,” said Shah.
“Absent a sustained resolution of the discom sector losses, India’s overall power sector reform will be stilted and ineffective.
“The government of India should consider implementing these recommendations and if state government lending and guarantees and discom subsidies are still required, they should be tied to the performance of the states in implementing reform in their distribution sectors.”
Garg said the extreme financial mess in the distribution sector is unsustainable and requires bold policy choices and government expenditure to create an economically sustainable national electricity system.
“New private competition can bring new capital and more innovation,” added Garg.