In a move aimed at bolstering the financial health of state-owned power distribution companies (DISCOMs) and enhancing electricity infrastructure, Finance Minister Nirmala Sitharaman announced in her Budget 2025 speech that the government will incentivize states to undertake reforms in the power sector. The proposed measures include an additional borrowing allowance for states contingent on improvements to electricity distribution and intra-state transmission capacity.
According to the finance minister, states implementing these power sector reforms will be eligible for an additional borrowing allowance of 0.5% of their Gross State Domestic Product (GSDP). This financial incentive is directly tied to efforts to improve the operational and financial performance of DISCOMs.
The announcement comes against a backdrop of significant financial struggles within the state-owned power distribution sector. Reports indicate that the total accumulated losses of these DISCOMs reached a staggering Rs 6.5 lakh crore by the end of fiscal year 2022-23. These losses have raised concerns about the long-term viability of the sector and its ability to support India’s growing energy needs.
“The extra borrowing allowance provided to states, contingent on the implementation of reforms, will also strengthen the operational efficiency and financial health of power distribution companies, ensuring that the benefits of clean energy reach all corners of the country,” said Naresh Mansukhani, CEO of Juniper Green Energy, highlighting the potential positive impact of the proposed changes.
Several factors have been identified as contributing to the financial woes of state-run DISCOMs. Shripad Naik, Union Minister of State in the Power Ministry, cited poor billing and collection practices, delays in tariff orders, the absence of inflation adjustments in power purchase agreements, and widespread power subsidies as key reasons for the losses faced by 68 state-run entities.
The urgency for addressing these issues was further emphasized in a virtual meeting held on January 30th, led by Minister for Energy Gottipati Ravi Kumar. The minister noted that the widening gap between the average cost of supply (ACS) and the average revenue realized (ARR) is significantly undermining the financial stability of distribution utilities. This gap, he said, is primarily driven by the under-recovery of power purchase costs, non-cost reflective tariffs, and distribution losses. The meeting highlighted the critical need to bridge this gap to ensure the sustainability of the power distribution network.
The government’s move to incentivise reforms through increased borrowing allowances represents a concrete step towards addressing these long-standing issues. It aims to encourage states to improve their DISCOMs’ efficiency, ultimately contributing to a more robust and reliable electricity distribution network across the nation. The success of this initiative will depend on the commitment of states to implement the necessary reforms and the effectiveness of the measures put in place.
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