Electricity distribution to the end consumer in India needs reform in order to achieve the target of electricity to all by 2019, says the World Bank.
A World Bank study has termed distribution utilities as the weakest link of the Indian power sector, and recommended expanding their accountability and freeing up regulators from external interference to make the sector attractive to investors.
The study suggested the need for effective targeting of subsidies as half the financial support is not reaching the targeted beneficiaries. According to it, the fragile financial health of utilities is limiting their ability to invest for the delivery of better services.
Even if electricity tariff rise by 6% per year to keep up with the cost of supply, annual losses of utilities will reach Rs 1.25 lakh crore in 2017, the multilateral agency said in a report titled ‘More Power to India – the challenges of electricity distribution’.
The accumulated losses of distribution utilities totaled Rs 1.14 lakh crore in 2011 and rising, the report said. The Department of Economic Affairs and the Planning Commission had mandated the World Bank to review India’s power sector in 2010.
The report is based on its analysis of utilities based on their financial data and operation reports between 2003 and 2011. The report, submitted in last December, was made public Tuesday.
“Mounting regulatory assets (cost that utilities aren’t able to recover because of lower tariff) have added to the discoms’ cashflow problems, jeopardizing routine operations.
In Tamil Nadu, Rajasthan, Punjab, Uttar Pradesh, Haryana, Delhi and West Bengal, utilities have had to borrow heavily to fund the deficit of revenues over costs,” wrote Sheoli Pargal and Sudeshna Ghosh, who authored the 225-page report.
“Although the appellate tribunal has ruled that regulatory assets must be recovered over three years, the sheer magnitude of current regulatory assets means this would cause a major tariff shock,” they said. “India has a good legal and regulatory framework in place but its compliance is an issue.
Two decades after the initiation of reforms, an inefficient, lossmaking distribution segment and inadequate and unreliable power supply major constraints to India’s aspirations for growth,” said World Bank country director to India Onno Ruhl.
Political decision to supply below-cost power to agricultural and rural consumers has also weakened utility finances, the report said. The share of agriculture in country’s electricity consumption was 23% in 2011, while it accounted for just 7% of revenue for utilities.