NEW DELHI: In what may be a game-changer for the country’s ailing electricity distribution sector, the two state-run power giants — NTPC and PowerGrid Corporation of India Limited (PGCIL) — have signed an agreement to set up a joint venture discom: National Electricity Distribution Company Limited (NEDCL).
NEDCL, a 50:50 joint venture, will focus on managing challenging distribution areas where the retailers, also known as discoms, face power theft and other difficulties. “The main aim is to undertake the business for distribution of electricity in distribution circles of India and related activities,” PGCIL said in a statement.
That apart, the recent move paves the way for the two central public sector entities to enter the power supply business, which until now has largely been the territory of state discoms. Coming at a time when state discoms are struggling to contain their losses, experts say the move is likely to have far-reaching ramifications for the segment.
“We have always been very vocal about having a centralised agency to discharge payments for power purchase for renewable energy since we expect more domestic and foreign investments in this sector. A national level agency is certainly preferred over the state utilities and is expected to introduce certainty of payments for power purchase among many other things,” said Venkataraman Rajaraman, Director - Infrastructure Group, India Ratings and Research.
Over the years, successive governments have tried to address the issues plaguing the power distribution segment, but in vain. In 2015, the NDA government had launched the Ujwal DISCOM Assurance Yojana (UDAY) to turn around the fortunes of beleaguered state discoms. Short on cash, the discoms, however, continue to struggle plagued by issues ranging from inadequate tariff hikes, high aggregate technical and commercial losses, inadequate and untimely subsidy disbursements.
Losses of the state-owned discoms jumped by over 40 per cent to Rs 21,658 crore at the end of FY19. At the same time, the dues of discoms to power generation companies (gencos) stood at Rs 38,023 crore. Discoms’ flagging fortunes have not only affected gencos but have also caused stress in the banking sector which is faced with huge NPAs. The problem has only multiplied with the states’ refusal to ink new power purchase agreements (PPAs), as they are not willing to buy more electricity.
In such a situation, the creation of a national electricity distribution company, which also serves as a central electricity buying agency, could potentially address several of these issues. It could bring relief to power producers, bring stranded capacity back to life, ensure timely payment and address the issue of stressed assets in power generation. The new entity could also procure electricity at competitive rates, the benefits of which could then be passed to end consumers.
Rajaraman also pointed out that when payments from discoms get delayed even by a year, it increases the default rates in the distribution sector where investments are expected, not at all encouraging for a growing sector. “The least an investor would expect is certainty of payments for goods and services sold. Investors repose a good amount of confidence in SECI type of PPA and payment mechanism. It will be good to have all the RE projects under SECI mechanism, improve payment security mechanism available with SECI and enlarge its scope. In this context, the least expectation from NEDCL is that it would pave the way to honouring the contractual obligations under power purchase/sale agreements in letter and spirit,” he said.