Electricity distribution companies (Discoms) are the backbone of the country’s power sector. Their poor financial health can have a ripple effect on the efficient functioning of the electricity generation and transmission sector. For India’s growth momentum to stay intact, the effective functioning of all three is crucial. The Central Electricity Authority’s (CEA’s) Optimal Generation Mix report for 2029-30 projects a peak electricity demand of 334.8 gigawatts (GW) and electrical energy requirement of 2,279.7 billion units (BU) for 2029-30. To meet this demand, India needs to add 777.1 GW of capacity, including 251.7GW of coal and lignite, 292.7 GW of solar photovoltaic, 99.9 GW of wind and 53.8 GW of hydro.

Given the uncertainty around Discoms being able to effectively cater to demand, Indian consumers, especially commercial and industrial (C&I), installed 77 GW of captive installed capacity as of June 2022. Further, most residential consumers have backup power, which either runs on battery or diesel, adding to carbon emissions. In rural areas, people stack fuel like kerosene, solar home systems and solar pumps, in addition to the grid, to deal with erratic power supply.

The political economy is critical in determining the electricity tariff, with most States providing subsidies to agricultural and residential consumers. However, these subsidies are poorly targeted, adding to the financial woes of Discoms.

In the last couple of years, the government has announced several measures to instil financial discipline in Discoms — improved cash flows, a streamlined accounting process, differential time-based tariffs and strengthened demand projections.

The recent amendment to the Electricity (Second Amendment) Rule 2023 aims to improve subsidy payments to Discoms by streamlining the accounting, reporting and billing processes. Moreover, the government’s decision to implement Time of Day (ToD) tariffs for C&I consumers from 2024 onwards and smart prepaid meters’ installation will not only ease the strain on the grid during peak hours but also encourage responsible electricity consumption patterns and optimise costs. Shifting the power demand from evening to daytime can help reduce tariffs by tapping into solar power, and such measures can promote greater deployment of clean energy.

With the help of the July 2023 CEA guidelines on power demand projections, Discoms can plan and optimise their operations, resulting in reduced losses and improved efficiency.

The Finance Ministry has earmarked ₹1.4 trillion ($17.3 billion) under additional borrowings in FY24 for States to undertake power sector reforms. This includes transparency in the reporting of financials, timely rendition of financial/energy accounts and auditing, providing subsidies through direct benefit transfer (DBT) to consumers and achieving targets for reduction in Aggregate Technical and Commercial (AT&C) losses.

These government initiatives are already creating a positive impact. AT&C losses have reduced from 23.7 per cent in FY16 to 15.8 per cent now, according to the Ujjwal Discom Assurance Yojana (UDAY) dashboard. The government aims to reduce losses by improving the billing and collection ratio through smart metering.

The writers are with Institute for Energy Economics and Financial Analysis