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Operating losses of 30 state power distribution companies (discoms) is expected to remain sizable at 40-45 paise per unit this fiscal despite a 15-20 per cent reduction year-on-year, stated a report by CRISIL Ratings. Operating losses is denoted by the gap between average cost of supply (ACS) and average revenue realised (ARR) per unit of power. The elevated operating losses and increase in borrowings to fund the losses, it added, has been driven by elevated cost of supply and subdued tariff hikes. That, in turn, will keep credit profiles weak and discoms reliant on timely government support.

Ankit Hakhu, Director, CRISIL Ratings, said, “Though efforts have been made to reduce the ACS-ARR gap, the tariff hike trajectory has historically been slow to adjust to increasing costs. For instance, while ACS rose more than 90 paise during the past two fiscal years due to a sharp increase in power cost amid high demand, ARR increased by only 60-70 paise.”

There are multiple reasons for the slow growth in ARR, CRISIL said. First, even at the national level, despite improvement, there have been delays in the release of tariff orders. For instance, discoms in 10 of the 36 states and union territories (UTs) witnessed delayed or no release of tariff orders for fiscal 2024. Second, regulatory support mechanisms such as automatic pass through have been implemented in only 15 states and UTs. Third, the improvement in billing efficiency has been slow and it remains below 90 per cent, impacting the revenue of discoms and keeping the ACS-ARR gap at 40-45 paise per unit this fiscal.

That said, it will be only the second instance of the gap narrowing below 50 paise per unit in the past five fiscals.

Ankush Tyagi, Associate Director, CRISIL Ratings, said, “The narrowing of the ACS-ARR gap will be primarily due to an expected moderation in ACS from its peak last fiscal, led by a reduction in power cost as domestic power supply improves and cost of generation reduces. It is also supported by slow but steady improvement in ARR and reduction in aggregate technical and commercial (AT&C) losses in the units getting supplied and billed, thereby supporting improvement in revenue for discoms.”

CRISIL Ratings said that the operating losses will remain large even as they are expected to slip from more than Rs 30,000 crore in the past two fiscals to Rs 25,000- 30,000 crore this fiscal. This, it added, will lead to increased debt in balance sheets to fund the losses and keep the credit profiles weak. 

Due to this, it becomes crucial for the discoms to receive continued improvement in subsidy realisation from state governments. While subsidy disbursements from states have been more than 100 per cent and timely over the past three years, any dilution in state support or delay in subsidy realisations will pose downside risks to the estimates of operating losses.
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