Policy Brief
The Policy Brief is written by Ashoka University students from course ECO-3514 offered by ICPP in collaboration with the Economics Department.
Our policy recommendation combines a mandate of Rooftop Solar Panels for establishments larger than a stipulated size, while providing an incentive structure to public DISCOMs to implement this policy.
India’s power sector, and power sectors in general, are constituted by two key processes: generation and distribution. Distribution companies, or DISCOMs, play a crucial role as intermediaries, linking power producers to households and serving as the primary interface between utilities and consumers. They purchase electricity from producers and sell it to consumers. In India, most DISCOMs are state-owned, though some private companies operate in specific cities.
According to NITI AYOG, there are 70 DISCOMs currently operational in India, out of which 57 are state-owned enterprises while 13 are privately run. A majority of public DISCOMs are loss making, more than 51 of them. The latest PFC report, pegs the total losses accumulated to Rs. 6.77 lakh crores in 2024. This amounts to about 3-4% of Indian GDP in 2023, based on World Bank data. The figure below shows state-wise accumulated DISCOM losses as a percentage of the national aggregate losses.
Why are DISCOMS performing so poorly?
The simple answer is that their average cost of supply (ACS) is greater than their average revenue realised (ARR). And it is the high costs, not low revenues, that give rise to this problem. India’s domestic power tariffs are at par with other neighbouring countries and its tariffs for commercial and industrial consumers are higher than the local subcontinent norm (see Annexure 1). According to an analysis by National Herald, Indians pay up to four times the cost of producing electricity in the form of high tariffs, despite incurring the lowest of production in both fossil-fuel and renewable energy. And this is due to poor distribution systems.
India’s DISCOMs are touted to be plagued by a multitude of issues that range from mismanagement to poor billing systems. First, they under-utilise the vast capacity that is available.This underutilisation results in fixed costs being distributed over a smaller quantity of electricity units, leading to an increase in the distribution cost per unit. A reply in the Lok Sabha from the Ministry of Power (MoP) states that capacity utilisation of power plants was under 60% in 2016. Second, wastage along existing power grid networks due to poor infrastructure and congestion results in substantial losses of electricity. In 2018 about 22% of all electricity generated was lost due to distribution wastage, while the number reached about 40% for many states, according to the MoP. Third, long-term, inflexible power purchase agreements lock DISCOMs into fixed payments that must be made regardless of the cost of power generation. The generation market of power has experienced significant efficiency gains including a reduction in costs. However, DISCOMS are locked in for a 25-year period with static prices and scope only for an upward revision of tariffs, and are hence not able to receive benefits of falling generation costs. Finally, DISCOMS have been unable to update their distribution systems to adapt to sources of renewable energy and thus connect their grid with cheaper sources of electricity. This has further deteriorated their competitiveness with newer private DISCOMs that have been supplying electricity at cheaper rates as a result of greater investment in renewable sources.
These reasons have led to public DISCOMs having their Aggregate Technical and Commercial (AT&C) losses accumulate over time, increasing their profit gaps and forcing upon them colossal losses. Any policy to improve their financial health and competitiveness must focus on bringing these AT&C costs down and at par with private profit-making distribution corporations. As seen in the figure below, AT&C losses have not decreased by a sufficient degree, with improvements over the last ten years totalling to a mere 4-5%.
Public vs Private DISCOMs
After the introduction of the Electricity Act 2003, the generation, transmission, and distribution responsibilities of the state electricity boards have been delegated to individual state-owned enterprises. For distribution, this has resulted in the creation of a monopoly led by state-owned companies. These companies, DISCOMs, suffer from persistent financial losses due to structural issues. They have outdated, long-term, inflexible-cost contracts with Generation Companies (GENCOs), which may be private or publicly owned, to provide the electricity demanded. Coupled with this, DISCOMs also sell electricity at discounted prices to certain consumers, such as agricultural and residential households as per government instruction. The costs of these discounted prices are supposed to be primarily recovered through subsidy payments by the state governments, but which are often delayed leading to cash flow and debt issues.
Although the involvement of private bodies is permitted in the market of electricity distribution, private DISCOMs are not very common. Together, state-power departments and government-owned businesses (i.e. non-private DISCOMs) generated 93% of the sector’s income and energy sales in 2019–20. There have been differing experiences with the private sector’s involvement in distribution. In Delhi, the supply and wire operations were turned over to privately held firms when the distribution sector was privatised in 2002. The financial performance of DISCOMs improved as a result, and aggregate technical and commercial (AT&C) losses were significantly reduced. Between 2001–02 and 2018–19, Delhi’s AT&C losses decreased from 45% to 9%, and DISCOMs began operating at a profit. However a similar endeavour had failed in the state of Odisha, where the state cancelled all licences issued to Reliance Power in 2015 after it failed to improve efficiency and performed “abysmally” according to the Odisha Electricity Regulatory Commission (OERC). According to the Economic Times, other states with failed attempts at privatisation or private franchisee models included Maharashtra, Bihar, Madhya Pradesh and Uttar Pradesh.
However, urban private DISCOMs in India are doing much better when compared to other state-owned ones (see Annexure 2), due to their operational efficiency, their professional management, and reduced political interference. They operate with a profit-driven approach, ensuring timely billing, higher collection rates, and strict action against defaulters, unlike state DISCOMs often constrained by political pressures and inefficient subsidy practices. Private players face less political interference, enabling independent decision-making and the adoption of customer-centric strategies such as reliable electricity supply and responsive service mechanisms. Additionally, they employ professional management teams, conduct frequent energy audits, and have better access to capital, which allows for continuous improvement. In contrast, state DISCOMs grapple with outdated systems, inadequate funding, and legacy inefficiencies, making it harder for them to compete financially or operationally with private counterparts. However, when we take the ‘private model’ outside urban centres and grow them on large scales, inefficiencies in performance creep right back in.
While state-owned DISCOMs can learn from private players, the issue is more structural and privatisation is not the one-stop solution to such structural issues. As seen with various failed experiments with complete privatisation of DISCOMs, states cannot “sell away” this problem.
How to Improve Efficiency
There are various methods through which a DISCOM could reduce its AT&C losses, both in terms of technical and commercial costs.
- Smart Metres and Using Flexible Tariffs
DISCOMS could install smart metres at the locations of their customers. These metres help track consumption in real time and can be used by both agents to monitor consumption. These metres also enable DISCOMs to charge differential tariffs during different periods of the day to encourage consumption during peak supply periods and deter consumption during periods of high demand. Such a balancing exercise will help distributors normalise demand at a certain baseline and reduce costs associated with congestion and underutilisation. Smart metres also enable the future use of prepaid tariff systems.
- Mandating Rooftop Solar Panels in Urban Areas
On-Grid Solar Rooftops allow distribution costs to be reduced significantly. Although they require a fixed one-time cost of installation, they can help generate great savings to households. Further if these solar rooftops are integrated with the central electricity distribution grid, consumers with solar capacity could benefit from ‘net-metering’. Net metering is a billing mechanism that allows individuals with on-grid solar rooftop plants to ‘sell’ (registered as negative units on their bills) for the excess electricity they generate and feed back into the grid. This excess electricity is consumed by other consumers.
- Focusing on Renewables and Reducing Commercial Tariffs
Public DISCOMs have been slow to invest in renewable energy infrastructure, especially when it comes to linking existing generation sites onto the central distribution grid. Generation and distribution costs of renewable energy sources have been cheaper, allowing private DISCOMs to tap into this market. Solar power transmission benefits from something called a ‘Transmission Loss Waiver’. All distribution across electricity results in loss of electricity, however distributors of renewable sources of power can claim the exact units of electricity they have injected into the grid at the source point. In other words, if you put in 10 MW at the source point, you can take out 10 MW at sink/load point, whereas a fossil-fuel power distributor would recover a fraction of the amount he injected depending on rates of energy loss. This coupled with the high tariffs that Public DISCOMs levy on commercial and industrial customers, has caused a growing trend of large paying commercial clients shifting to more private distributors (who are more dependent on renewable sources of power). This has further strained the revenue sources of public DISCOMs.
The availability of various measures of reducing AT&C costs leads to one conclusion: the solutions to improve DISCOMs’ financial health exists. So why aren’t we seeing the implementation of these technologies? This is due to the lack of incentives in the public sector and the stickiness of change in government agencies. Therefore our policy framework should aim to provide incentives to public DISCOMs and help them achieve the goal of reducing their AT&C losses.
The Policy Framework
Our policy recommendation combines a mandate of Rooftop Solar Panels for certain domestic, commercial and industrial establishments while providing an incentive structure to public DISCOMs to implement this policy. This would combine the three solutions offered above with a focus on (b).
A CEEW report estmiates average electrified household consumption in Delhi to hover between 5-9 kW per day. This number is likely to be an overestimation of national average household consumption, as Delhi is prone to harsher weather conditions. The cost of setting up a rooftop solar unit of 3kW is between Rs. 1,89,000 – 2,15,000. But, households setting up solar units are also eligible to receive a subsidy, from PM Surya Ghar Yojna, of Rs. 78,000. The net cost comes down to about 1 lakh rupees. Research shows that increasing the scale of solar panel production due to rising demand will bring this cost down further.
Our recommendation is to empower DISCOMs to mandate households above a certain size, commercial establishments, industrial locations to install solar rooftops. This would reduce the need for distribution and allow consumers to take advantage of the lower unit cost of production that solar energy provides. Such a shift would also reduce the volatility of power production costs as changes in coal prices would not impact solar power costs. Additionally, such a policy would reinforce India’s commitment to renewable energy. While this would improve local ecological distress, it would help India’s standing in diplomatic discussions of climate finance.
The largest barrier to such a mandate is the large fixed cost associated with setting up solar panels. We invite the government to mitigate this cost by increasing the subsidies it provides. Currently, the subsidy is capped at Rs. 78,000 for 3kW. The government should increase subsidies for households that set up a higher capacity solar unit. Further, it should allow households that generate electricity above their requirements to feed it back into the central grid and compensate them monetarily. Currently, the government is funding the gap in DISCOM revenue and cost. To put into perspective, if the current DISCOM losses of 6.77 lakh crores are used by households to purchase solar units of 3kW each, more than 6.5 crore households can be covered. That is more than 21% of India’s households.
Policy Incentive Structure
To mandate solar panel adoption at the national level we need to leverage incentives for DISCOMs through their existing subsidy payment structure. To do so, this policy framework should outline clear targets, scope and incentives for adoption. Within different categories of buildings, installation requirements would differ according to rooftop size and energy needs. Take for instance a similar policy in the sector of distributing water. In the city of Bangalore, rainwater harvesting is compulsory for owners of sites with not less than 108 sq m of area. Likewise, domestic buildings over a certain size can be mandated to install rooftop solar panels (thus ensuring only those who can afford solar panels will be made to switch to renewable energy). Targets could include specific installation deadlines as well as capacity targets.
Financial incentives to DISCOMs could include giving grants to DISCOMs who update their existing infrastructure to accommodate solar/renewable energy. DISCOMs that meet targets could receive faster repayments from the government while those that do not meet this mandate, shall not.
Final Recommendations
- Mandate rooftop solar panels in urban residential centres, large agricultural farms, all commercial and industrial units.
- Renew grid infrastructure towards renewable energy sources through an incentive structure for DISCOMs.
- Install smart metres and use flexible tariffs to effectively manage electricity demand.
Annexure 1
Annexure 2
- The top ranked three DISCOMs are privately run
- 85% of all private DISCOMs feature in the top 30 ranked DISCOMs
References:
Business Standard https://www.business-standard.com/industry/news/discoms-power-cost-debt-rose-with-rising-demand-in-fy23-govt-report-124031101136_1.html
Carbon Copy https://carboncopy.info/caught-in-the-power-maze-indias-discoms-battle-solars-growing-costs/
Centre for Social and Economic Progress https://csep.org/impact-paper/breaking-down-the-gap-in-discom-finances-explaining-the-causes-of-missing-money/
Centre for Social and Economic Progress https://csep.org/working-paper/a-granular-comparison-of-international-electricity-prices-and-implications-for-india/
Economic Times https://energy.economictimes.indiatimes.com/news/power/why-public-listing-of-power-discoms-is-a-trillion-dollar-opportunity/101446088
Financial Express
https://www.financialexpress.com/opinion/can-discoms-spark-a-turnaround/3559014/
Government of India, Dashboard
https://iced.niti.gov.in/energy/electricity/distribution
Institute for Energy Economics and Financial Analysis https://ieefa.org/wp-content/uploads/2020/08/The-Curious-Case-of-Indias-Discoms_August-2020.pdf
National Herald India https://www.nationalheraldindia.com/india/why-are-indians-paying-three-to-four-times-the-cost-of-generating-electricity.
National Institute of Public Finance and Policy https://www.nipfp.org.in/media/medialibrary/2024/07/DISCOM_Finance_Working_Paper_Prayas_090724.pdf
Mercom India
https://www.mercomindia.com/adani-mumbai-top-discom-rankings-fy23
National Institute of Public Finance and Policy https://www.nipfp.org.in/media/medialibrary/2024/07/DISCOM_Finance_Working_Paper_Prayas_090724.pdf
Observer Research Foundation https://www.orfonline.org/expert-speak/discoms-the-weak-link-in-indias-energy-transition
PRS Legislative Research https://prsindia.org/billtrack/prs-products/discussion-paper-power-distribution-sector
Press Information Bureau, Government of India https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2013501
Torrent Power
https://www.torrentpower.com/pdf/news/MediaReleaseQ4202324Final.pdf
Trilegal Magazine https://trilegal.com/magazine/time-to-revisit-long-term-power-purchase-agreements-issue-5.html