Annual Integrated Rating & Ranking: Power Distribution Utilities

Tenth Annual Integrated Rating and Ranking of Power Distribution Utilities As per the Framework approved by Ministry of Power.

With the changes made in the 10th Integrated Rating Exercise and supporting analysis, a more comprehensive picture of the power distribution sector has emerged. Discoms in select states are consistently performing well on financial sustainability metrics. On the performance excellence metrics, private Discoms have performed well.

Background and Introduction

India’s power sector has achieved numerous feats in recent years. With total installed generation capacity of 403.76 GW (as on June, 2022). India has transformed from a power-deficit nation where load shedding was commonplace to a power-surplus country that exports power to Bangladesh, Nepal, and Myanmar. All of India’s villages and almost all households have been electrified. The entire nation has also been connected to a single grid. In renewables, India has become one of the global leaders.
In 2021, it ranked third in the world by installed renewable capacity and is the only country in the G20 that is on track to achieve its targets under the Paris Agreement. During the 5 years, India has witnessed the fastest rate of growth in renewable energy capacity addition among all large economies, with renewable energy capacity (including large hydro) growing 1.6 times and, as of June 2022, stood at about 160.91 GW.

State & Private Utilities

State of India’s Power Distribution Sector

Analysis of losses over FY19–FY21 shows that the deficit is widening (Exhibit 3). The absolute cash-adjusted gap during the period increased by 10.0% This rise was almost entirely due to the sector’s
rising ACS-ARR gap, given the gross input energy during the period remained almost constant. The national average ACS-ARR gap grew 11.4% during the period, from INR 0.83 to INR 0.93 per kWh. This means on an average India’s distribution utilities are making a loss of 93 paisa per unit of input energy. Exhibit 4 also shows the various components of the ACS-ARR gap and how they have evolved.
The cash-adjusted revenue was only adequate to meet the power purchase and O&M costs. This shortfall was driven by poor collections, lower billing efficiency, low tariff subsidy realization and
tariffs not being cost reflective. The problem has worsened in the past 3 years. Revenues grew at
only 1% mainly driven by a marginal increase in AT&C loss from 20.9% in FY19 to 21.6% in FY21.
Costs grew at 1.6% in the same time period leading to an increase in the gap. This was driven by interest costs growing at 7% and O&M costs growing at 6%.

Trend in national cash adjusted gap for FY19 to FY21

This financial deficit is manifesting as a liquidity crunch in the sector, with discoms’ current liabilities
exceeding their overall current assets, and amounting to nearly twice the value of their current liquid assets12. The sector’s total liquidity gap is nearly INR 3.04 lakh crore (Exhibit 5). At the overall sector level, discoms’ combined liquid assets are adequate to cover only their generation, transmission and operational liabilities. Including their non-liquid assets, their lender obligations can be covered too. However, they have even more liabilities, which cannot be covered without liquidating non-current assets or marshalling external support.

Top contributors to subsidies receivable and regulatory assets

In addition to subsidy receivables and regulatory assets, another external factor inhibiting discoms
in certain states is slow revision of tariffs. In FY22, 10 states did not issue tariff orders. Of these 10 states, 7 did not issue tariff orders in FY21 either (Exhibit 9). Partly because of slow revision of tariffs, cash-adjusted revenue growth (1.0%) has not kept pace with growth in overall costs (1.6%) in the sector—making existing tariffs increasingly non-reflective of costs.

Strategic directions to address sectoral challenges

India’s power distribution sector needs urgent interventions, considering its losses have
already started affecting adjacent sectors and pose a growing risk to India’s financial institutions. Specifically, the sector needs alleviate measures to reduce AT&C losses and create a more conducive external environment. This section details the main initiatives—both ongoing and upcoming—that the Ministry of Power has undertaken to address the sector’s challenges. While the responsibility of
distribution lies on the state, these initiatives have been taken in recognition of the catalytic role that the Center can play to reform the sector. The Central initiatives are followed by a set of best practices followed by highperforming discoms, which other discoms can adopt. These best practices are an outcome of the analyses done as part of the 10th Integrated Rating Exercise. The section ends with specific suggestions for states to better support discoms and foster a conducive environment in which they can thrive.

Key Insights
MGVCL has a cash adjusted ACS-ARR gap of INR -0.09 per kWh (top tertile in the sector). The
primary driver of its ACS-ARR surplus is high cash adjusted revenue of 100%. MGVCL is also
performing well on interest costs as well as O&M costs. However, its performance on power purchase costs lies in the middle tertile, forming 83% of the booked revenue. MGVCL’s performance on cash adjusted revenue and interest costs improved during FY19-FY21. However, its performance on power purchase costs and other expenses declined during FY19-FY21.

Benchmarking of ACS-ARR gap components (3-year weighted average) (Amount in INR ‘000 crores)

MP Madhya Kshetra Vidyut Vitaran Company Limited (MPMaKVVCL)
MPMaKVVCL is a state owned discom incorporated in May 2002. It serves 47 lakh+ customers
in the commissionaires of Bhopal, Hoshangabad, Gwalior and Chambal. In FY21, MPMaKVVCL had a revenue of INR 14,478 crores, profit after tax of INR -1,450 crores and sold 19,150 million units of energy.

Key Insights
MPMaKVVCL has a high cash adjusted ACS-ARR gap of INR 1.56 per kWh (bottom tertile in the
sector). The primary driver of its high ACS-ARR gap is low cash adjusted revenue of 83%, which
translates to ~INR 2,486 crore of unrealized revenue.The cash adjusted revenue is not sufficient to meet the immediate power purchase expenses, O&M expenses, interest costs or other expenses. MPMaKVVCL’s performance on all ACS-ARR gap components has improved from FY 2019 to FY 2021.

Benchmarking of ACS-ARR gap components (3-year weighted average) (Amount in INR ‘000 crores)

MP Poorv Kshetra Vidyut Vitaran Company Limited (MPPoKVVCL)
MPPoKVVCL is a state owned discom incorporated in May 2002. It serves 62 lakh+ customers in
the commissionaires of Jabalpur, Sagar and Rewa. In FY21, MPPoKVVCL had a revenue of INR
12,053 crores, profit after tax of INR -2,754 crores and sold 16,630 million units of energy.

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