Current Affairs Focus Classes

Indian Economy
Class-I
Electricity Distribution Sector
a. Present Status
b. Reasons for poor financial Position
1
c. Initiatives taken by Government
d. Strategies needed- NITI Aayog’s Recommendations
e. Privatisation of DISCOMs- Pros, Cons and Way Forward
2 Renewable Purchase Obligation Policy

3 Prelims based MCQs

Mains Questions for Practice

4 a. Problems faced by DISCOMs
b. Initiatives taken
 Topic 1: DISCOMs: Present Status, Challenges and Strategies
Present Status:
India is the 3rd largest producer of electricity and almost every citizen has access to grid electricity. However, power distribution
continues to be the weakest link in the supply chain of the power sector. DISCOMs have incurred huge losses (Rs 90,000 crores),
which in turn reduces their ability to pay dues to the power generating companies (Rs 1.23 lakh crores) and repay loans to the
Banks. The poor financial health of the DISCOMs can cause negative domino effect on the economy
Reasons for poor financial position of DISCOMs
Higher Cost of Power Procurement: Power procurement accounts for almost 80 percent of the expense of the discoms. Discoms
have entered into expensive and long-term thermal Power purchase agreements (PPAs) based on incorrect estimates of power
demand.
Lack of Independence and Autonomy due to political interference in fixing tariffs leading to lower tariffs on electricity. The
DISCOMs end up supplying electricity to households and agriculture sector at subsidized prices leading to higher losses.
Cross-Subsidization of Tariffs: DISCOMs have increased the electricity tariffs for the industries to compensate for the losses. This
in turn has forced the industries to avail benefits under the Open Access Policy. Under the Open Access Policy, bulk consumers (>
1 MW) can purchase electricity directly from the open market (Power exchanges, direct agreement with the power generating
companies etc.). So, since the DISCOMs supply electricity to Industries at higher tariffs, the industries have shifted to buying
electricity at cheaper rates directly from open market.
Higher AT&C losses (22%) on account of Transmission losses, Commercial losses due to power theft, absence of metering,
inefficiencies in bill collection etc. The Global Average for AT&C losses is much lower at 8% (USA- 6%; China- 8%).
Higher Dependence on State Governments for the subsidies. Delays in receiving subsidy reimbursements from the government
add to the liquidity stresses of discoms.
Monopolisation: Presently, DISCOMs enjoy monopoly in distribution of electricity leading to absence of competition, higher
inefficiencies and poor service delivery.
Distribution Sector Reforms
Electricity Amendment Act, 2003: Established regulatory bodies - Central Electricity Regulatory Commissions (CERCs) and State
Electricity Regulatory Commission (SERCs); open access policy; Introduction of Renewable Purchase Obligation Policy (RPO).
Deen Dayal Upadhyaya Gram Jyoti Yojana–DDUGJY: Focuses on feeder separation (rural households and agricultural) and
strengthening of sub-transmission and distribution infrastructure in rural areas.
UDAY Scheme: Aims at improving the financial position of DISCOMs. Under the scheme, states are supposed to take over 75 percent
of the discoms’ debt and the DISCOMs were required to reduce AT&C losses to 15%.
Saubhagya Scheme: Electricity connections to all households (both APL and poor families) in rural areas and poor families in urban
areas.
Reforms based Results linked Revamped Power Distribution Scheme: Result-linked financial assistance to DISCOMs based on
meeting pre-qualifying criteria and achieving basic minimum benchmark. Under this scheme, the DISCOMs are required to reduce
AT&C losses to 12-15% by 2024-25 and eliminate gap between ACS-ARR.
Private Participation and Competition in Distribution: Some of the states have promoted private participation in the DISCOMs
through (a) Franchise Model (Bhiwandi Model) and (b) Privatisation of DISCOMs (Delhi, Surat, Ahmedabad)
Retail Choice to enable operation of multiple DISCOMs in a single area to promote competition and ensure efficiency.
Privatisation of DICOMs: The Centre has announced that it would privatise the DISCOMs in all the Union Territories.
Strategies needed
 Privatisation of DISCOMs
Benefits Challenges
• Ensure higher efficiencies in power distribution. • Loss of the welfarist nature of state-owned discoms that
• Reduce AT&C losses Example: AT&C losses in Delhi has come sustain the residential and agriculture sectors on subsidised
down from 55% (2002) to just 8% tariff.
• Timely payments to power generating companies would • Poor Financial viability of private DISCOMs
encourage higher investment in power generation. • Loss of the ability to serve the poor and the vulnerable
• Reduce NPAs of Banks • Loss of jobs of DISCOM employees
• Reduce burden on State Governments • Inability to reduce energy poverty
Way forward
 Successful in Delhi- Large Urban Area, Higher share of Middle-Class population, Marginal Agriculture sector.
 Failure in Odisha- Large Rural Areas, Electricity to Agriculture sector, lower population density.
 No ”One Size Fits all approach”. Different models in different states depending upon the consumer mix and geography- Private
DISCOMS, Franchise Model or state owned DISCOMs.

Topic 2: Renewable Purchase Obligation (RPO) Policy

What is it?: DISCOMs required to purchase certain percentage of electricity from various renewable energy sources.
Framework for RPOs?: Laid down under Electricity Act, 2003 and National Tariff Policy 2016
Types of RPOs: Solar RPO and Non-Solar RPO. In 2020, Government declared that procurement of power from large Hydropower
Projects (more than 25 MW) and Ocean Energy would be considered as Non-Solar RPO.
Who lays down the Targets for RPOs?: Annual Targets laid down by State Electricity Regulatory Commissions (SERCs). Long term
targets laid down by Ministry of Power.
Present Targets: Long Term target to be met by 2022. Total RPO: 21% (Solar RPO: 10.5% + Non-Solar RPO: 10.5%)
Renewable Energy Certificates (RECs): DISCOMs that exceed their RPO obligations can sell RECs to other DISCOMs that fail to meet
RPO target. 1 REC is equal to 1 Mwh.
Present Status of RPO
The Compliance of DISCOMs with respect to meeting RPO targets has been consistently poor. The compliance is less than 55 per
cent of the target for about 20 states.
New Proposal
Electricity Amendment Bill, 2022 seeks to impose penalties on the DISCOMs for not meeting RPO obligation policy.
 Prelims MCQ
1. Consider the following sources of Electricity Generation in India:
1. Thermal Power
2. Wind Power
3. Solar Power
4. Large Hydropower
Arrange the following in the descending order of their share in the installed power capacity:
(a) 1, 2, 3, 4
(b) 1, 3, 2, 4
(c) 1, 4, 3, 2
(d) 1, 3, 4, 2

Answer: d

2. Consider the following statements related to present status of Renewable energy in India:
1. Tamil Nadu is the largest producer of Wind Energy in India.
2. Rajasthan is the largest producer of Solar Energy in India.
3. The share of Solar energy in the installed power capacity is higher than that of wind energy.

Which among the statements given above is/are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: c

3. With respect to Renewable Purchase Obligation (RPO) policy, consider the following statements:
1. The RPO policy requires DISCOMs to purchase certain percentage of electricity from various renewable energy sources,
including Ocean Energy.
2. The annual targets under the RPO is set by the Central Electricity Regulatory Commission (CERC).

Which among the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: a

4. Consider the following statements:

1. Karnataka has the highest installed capacity of Solar power in India.
2. India’s largest floating solar power plant has been installed in Telangana.

Which among the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: c
5. With respect to Saubhagya Scheme, consider the following statements:
1. This scheme provides free electricity throughout the year to the identified poor families.
2. This scheme is implemented by the state-owned DISCOMs in the respective states.

Which among the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: d

6. Which among the following is/are the objectives of the Reforms based Results linked Revamped Distribution Scheme?
1. Reduce Aggregate Technical and Commercial losses (AT&C)
2. Eliminate the gap between Average Cost of Supply (ACS) and Average Revenue Realized (ARR)
3. Eliminate subsidies given to Farmers and households.
4. Privatization of loss making State-owned DISCOMs.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 1, 2 and 3 only
(d) 1, 2, 3 and 4

Answer: b

7. Which among the following sources of Renewable energy come under the policy of Renewable Purchase Obligation
(RPO) in India?
1. Small Nuclear Power Plants
2. Small Hydro-power Projects (less than 25 MW)
3. Large Hydro-power projects (More than 25 MW)
4. Ocean Energy

Select the correct answer using the code given below:

(a) 2 only
(b) 1 and 4 only
(c) 1, 2 and 4 only
(d) 2, 3 and 4 only

Answer: d
 Mains Question for Practice
1. The distribution sector has been the Achilles’ heel of the power sector. What are the major reforms introduced by the
Government to reform the power distribution sector. ( 10 Marks, 150 Words).

India has made rapid strides in power sector. However, DISCOMs incur huge losses (Rs 75,000 crores), which in turn reduces
their ability to pay dues to power generating companies and repay loans to Banks leading to negative domino effect.

The Government has introduced number of reforms to address the structural, operational and managerial inefficiencies
of the DISCOMs.
Electricity Amendment Act, 2003:
 Established Central Electricity Regulatory Commissions (CERCs) and State Electricity Regulatory Commission
(SERCs).
 Open access policy
Deen Dayal Upadhyaya Gram Jyoti Yojana: Focuses on feeder separation.
UDAY Scheme: Financial turnaround through States taking over 75% of DISCOM debt
Reforms based Results linked Revamped Power Distribution Scheme: Conditional financial assistance to DISCOMs on
meeting criteria such as reduction in AT&C losses.
Private Participation in DISCOMs through (a) Franchise Model (Bhiwandi, Maharashtra) and (b) Privatisation of DISCOMs
(Delhi, Ahmedabad, Odisha etc.)
Competition in the distribution sector and providing Retail Choice to Consumers (Budget 2021-22)

The distribution sector is a key to realize Government’s goals such as 24X7 Power, Make in India, Aatma Nirbhar Bharat
etc. Hence, the Electricity amendment Bill 2022 is a step in the right direction.
2. The power distribution continues to be the weakest link in the supply chain of the power sector. In the light of this
statement, discuss various constraints and challenges faced by DISCOMs in India. (15 Marks, 250 Words)

India has made rapid strides in power sector. It is the 3rd largest producer of electricity and almost every citizen has access
to grid electricity. However, the sector still faces significant challenges. Most Discoms incur heavy losses (around Rs 90,000
crores) due to structural, operational and managerial inefficiencies.

The Government has taken measures such as UDAY Scheme, Electricity Amendment Act, 2003, Open Access policy etc. to
bring about financial and operational turnaround of DISCOMs. However, these initiatives have failed on account of the
following:
Lack of Independence and Autonomy of the SERCs set up under EC Act, 2003. The political populism in fixing electricity
tariffs has led to cross-subsidization; higher losses; hurt domestic manufacturing and led to poor revenue realization.
Higher AT&C losses: Higher gap between average cost of supply (ACS) and the average revenue realised (ARR) due to
Transmission losses, Commercial losses (Power theft, absence of metering, inefficiencies in bill collection etc.)
Global average: 8% ( USA- 6%; China- 8%); India: 22%; Total losses: Rs 90,000 ( FY 2021-22)
Non-payment of Dues to Thermal power plants: Power procurement accounts for almost 80% of expenditure of discoms.
Discoms have oversubscribed to expensive and long-term thermal PPAs based on incorrect estimates of power demand.
The fixed costs of the excess capacity must be paid, even when no power is generated. Non-payment of dues has hindered
the investment in power generation, particularly, Renewable energy sector.
Higher dependence on States: The poor financial position of DISCOMs leads to their higher dependence on state
governments leading to higher Fiscal deficit of the states.
Monopolisation: Presently, DISCOMs enjoy monopoly in distribution of electricity leading to absence of competition, higher
inefficiencies and poor service delivery.

The distribution sector is a key to realize Government’s ambitious goals such as 24X7 Power, Make in India, Aatma Nirbhar
Bharat etc. Going forward, there is a need to bring about reforms such as Privatization of DISCOMs, Retail choice to
consumers, lower AT&C losses etc. The Draft Electricity Amendment Bill, 2020 and newly launched Revamped Power sector
scheme are steps in the right direction.