Union Budget 2021: Higher budgetary allocation needed to improve precarious financial position of DISCOMs

The distribution segment is one of the weakest links of the power sector in India, reeling under financial distress

Amol Kotwal January 29, 2021 21:38:00 IST
Union Budget 2021: Higher budgetary allocation needed to improve precarious financial position of DISCOMs

Power line. Image courtesy Tony Boon/Wikimedia Commons

In a few days time, the Union Finance Minister will present Budget 2021. There are a lot of expectations from the Budget, especially as it comes after the pandemic. Here’s a wish list for the energy sector:

Exemption of BCD (Basic Customs Duty) on solar module imports should be continued

The government has targeted aggressive capacity addition of solar power to the tune of 100 GW by 2022 and approximately 280 GW by 2030. The Make in India and Atmanirbhar Bharat initiatives is to promote the manufacturing of solar cells and solar modules domestically. The current installed capacity for solar cells in India is approximately 3 GW and for solar modules is approximately 10 GW, as per the Ministry of New and Renewable Energy. This capacity is not sufficient to meet the annual requirement, resulting in imports from other Asian countries.

The imports from Asian countries, especially China (85-90 percent of total imports) at cheaper prices, further hurts domestic manufacturing. Currently, 15 percent Safe Guard Duty (SGD) is levied on imports of modules, which is likely to continue up to July 2021. Given the challenges related to adequate domestic production capacity, Basics Customs Duty (BCD) exemption would provide a much-needed fillip for solar energy projects that have been bid for, based on lower equipment cost (or imports), to be smoothly executed and commissioned as per the committed completion timelines.

Categorising renewable energy as a separate sector from power for priority sector lending

As per the Reserve Bank of India (RBI) norms, banks' exposure to the infrastructure sector in India is limited to 15-20 percent of their total loans. The power sector has been stressed, driven by the financial health of distribution companies (DISCOMs), no takers for power produced from some of the thermal power plants, etc., exposing the financial health of the power sector. Renewable energy capacity addition is rapidly expanding and exceeding thermal power addition, driven by the competitive tariffs and the government's plan to increase renewable energy capacity.

Given the exposure of banks to the power sector reaching threshold limits, lending to renewable energy projects is getting restricted. By decoupling renewable energy from the traditional power sector, banks would be able to provide more funding for renewable energy projects.

Higher budgetary allocation to improve Power DISCOMs' financial position

The distribution segment is one of the weakest links of the power sector in India, reeling under financial distress due to higher AT and C losses, power theft, deteriorating revenue gap per unit of power sold (average cost of supply minus average realizable revenues (ACS-ARR gap)). The reduced power demand due to the COVID-19 lockdown further worsened the financial position of the DISCOMs.

According to PRAAPTI (Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators), DISCOMs total outstanding dues as of September 2020 stood at Rs 1.38 lakh crore while the DISCOMs outstanding dues to power generation companies (GENCOs) stood at Rs 1.38 lakh crore as of September 2020. In May 2020, the Finance minister announced a Rs 90,000 crore liquidity infusion into cash-strapped DISCOMs facing a demand slump due to the COVID-19 crisis, as part of the financial assistance package. This was later increased to Rs 1.2 lakh crore by the Ministry of Power. Despite these efforts, the financial position of DISCOMs didn't fare much better as the relief package was only a temporary measure.

According to the Ministry of Power, the losses jumped to approximately Rs 50,000 crores in FY 2019 from approximately Rs 30,0000 crores in FY 2018. The worsening financial position of the DISCOMs starts a vicious cycle that affects the entire ecosystem. The DISCOMs inability in paying off dues to GENCOS impacts the latter’s financial position, due to the long-pending overdue, further resulting in cascading impact on the power sector’s overall financial health. It is imperative to address the crisis of the power sector with rising levels of DISCOMs losses and an ever-increasing debt burden. As a result, there is a need for higher budgetary allocation in order to improve the power DISCOMs financial position.

The writer is Vice President, Industrial Practice, Frost and Sullivan

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