India’s policy think tank, Niti Aayog calls for greater financial autonomy for state-owned discoms: Report

Government think tank Niti Aayog has pitched for greater operational and financial autonomy for state-owned discoms, saying for a state-owned utility to succeed, there should be a clear separation between utility and state.

In a report titled ‘Turning Around the Power Distribution Sector’, Niti Aayog said the performance of state-owned discoms is also determined by the ability of the respective State Electricity Regulatory Commissions (SERC) to revise tariff frequently and adequately.

“…For a state-owned utility to succeed, there should be a clear separation between utility and state. The utility should have operational and financial autonomy. Good corporate governance practices, including the use of independent directors, can help ensure such separation,” it suggested.

It pointed out that there can be a variety of distribution franchisees, from models that are essentially outsourcing revenue collection to taking care of all distribution functions in a defined area. “In rural areas, private investors might not find it attractive to become licensees, but a franchisee model might be attractive,” it said.

Noting that discoms have a monopoly in their area of functioning, the think tank suggested that delicensing distribution can introduce competition and enable retail choice for customers. Niti Aayog observed that public private partnership (PPP) models can be useful in loss-making areas, where commercial operation might not be feasible without support in the form of Viability Gap Funding (VGF) from the government.

Niti Aayog, however, pointed out that even though now India has achieved universal access to electricity, power distribution continues to be the weakest link in the supply chain of the power sector.

Most distribution utilities are making major losses as a consequence of expensive long-term power purchase agreements, poor infrastructure, and inefficient operations, among others. “These losses, in turn, prevent them from making the investments required to improve the quality of the power supply and to prepare for the wider penetration of renewable energy,” it said. According to Niti Aayog, the distribution utilities’ inability to pay power generators endangers the financial health of the generators and their lenders, causing a negative domino effect on the economy.

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