Will Rs 3.05 trn investment change the fortunes of power equipment makers?

The government has announced to invest Rs 3.05 trillion in power distribution sector to achieve the ambitious targets for its electricity sector and propel demand for power equipment. However, the crippled power transmission & distribution (T&D) sector could play a spoilsport?
Mumbai 

In order to fulfil India’s energy needs, the government has set ambitious power generation targets mostly comprising renewable resources. However, the targets may remain pipedream if the health of distribution companies (discoms) remain weak. Against this backdrop, the Finance Minister Nirmala Sitharaman’s announcement in the budget 2021-22 to invest about Rs 3.05 trillion in the energy distribution segment - considered to be the weakest link in India’s vision for clean and smart electricity - is a step in right direction. Experts believe the package for revamping the loss making discoms is likely to give a huge boost to the electrical sector. “A figure of Rs 3.05 trillion will be invested in discoms for improvement of feeder separation, prepaid smart metering and upgradation of systems. This investment will improve the functioning of discoms and help in improving their health and viability,” said Anil Saboo, President, IEEMA.

Though the budget was short on details about the modalities to implement the package, the ministry has indicated that the disbursement of allocated funds is linked to the implementation of smart meters and submission of roadmaps to reduce the overall (AT&C) losses by the discoms.

While discoms lose tens of paise per kilowatt-hour they sell on an average, the service quality remains low. “The viability of distribution companies is a serious concern. A revamped reforms-based result-linked power distribution sector scheme will be launched with an outlay of Rs 3.06 trillion over 5 years. The scheme will provide assistance to discoms for infrastructure creation including pre-paid smart metering and feeder separation, upgradation of systems, etc tied to financial improvements," Nirmala Sitharaman said during the budget speech.

India has achieved almost 100-per cent household electrification with load-shedding drastically down. The emphasis of the government to make the Indian manufacturing sector cost competitive depends hugely on costs of electricity, which the government is looking to address through competitiveness. The distribution companies across the country are monopolies, either government or private. According to the minister, there is a need to provide choice to consumers by promoting competition. The government is preparing a framework to give consumers alternatives to choose from more than one power distribution company. Sunil Misra, Director General, IEEMA, said, “Giving consumer the choice of more than one Discom will set into motion competition amongst monopolistic companies, which will boost efficiency and accountability. This will be good for their own health also.”

Anil Chaudhry, CEO, Schneider Electric India Pvt Ltd, added, “The proposal to offer more choice to consumers by introducing competition in the power distribution space by kick-starting Rs 3 lakh crore reforms-based result-linked power distribution sector scheme for state power distribution companies is likely to address the long hanging Transmission & Distribution (T&D) issues and give relief to the power producers, thereby ensuring health for the entire value chain. It is also good to see the government government’s focus towards ensuring smart metering, which will help cut the commercial losses in power distribution.”

By providing Rs 1.10 trillion for railways/airports and 100 percent electrification of broad-gauge rail tracks by December 2023, the budget focuses on boosting infrastructure. “A record sum of Rs 1.1 trillion is assigned for railways, of which Rs 1.07 trillion is given for capital expenditure. Project imports benefit is also being extended to all high-speed railway projects, which will boost the electrical equipment sector and bring new opportunities for electrical equipment manufacturers,” said Vijay Karia, Vice President, IEEMA.

According to Prabhajit Kumar Sarkar, MD & CEO, Power Exchange India Limited (PXIL), “The Union Budget for 2021-22 has given a big push to the power sector by announcing close to Rs 3.06 trillion power distribution sector scheme. This move is expected to assist discoms for infrastructure creation tied to financial improvements, including prepaid smart metering, feeder separation and upgradation of systems. Additionally, the government’s proposed framework to give consumers more than one discom choice was a much-needed move. It will help to enhance efficiency in the power distribution sector, induce fair competition and address the monopoly business of discoms.”

Discom reforms to benefit power gencos 
According to Fitch Ratings, the Government of India's proposed plan to improve the operations and finances of state-owned distribution companies (discoms), the weakest link in India's power supply value chain, will help mitigate cash flow stress observed in rated power generation companies (gencos) over time. The $ 41 billion plan intends to trim electricity losses, gradually narrow discoms' cost-revenue gap, improve the reliability and quality of power supply, and promote more sustainable competition in the sector over FY22-FY25 (fiscal years ending March 2022-2025).

Discoms are saddled with huge accumulated losses due to a combination of crippling debt, expensive power, technical and commercial losses, and less-than-commensurate increases in tariffs. The government in 2015 introduced a voluntary rehabilitation scheme, Ujwal Discom Assurance Yojana (UDAY), to turn around distressed discoms. “While UDAY was more comprehensive than previous packages, it primarily drove debt restructuring of discoms without significant sustained reduction in technical and commercial losses, and the cost-revenue gap,” said the Fitch Ratings report.

The pandemic aggravated the discoms' difficulties due to the fall in electricity demand from higher-paying commercial and industrial customers, payment concessions, and delay in cash collections. The central government's liquidity support through Rs 1,200 billion of conditional concessionary loans alleviated the situation. However, adequate tariff hikes and reduction of losses are essential for a sustainable structural improvement of the state discoms. To this end, a holistic approach that includes infrastructure updates, smart metering, demand-side management and regular tariff revisions would go further, said Fitch Ratings in the report. 

Walk the talk
With number of reforms undertaken to strengthen and modernise the distribution sector, the additional investment of Rs 3.05 trillion in the next five years will definitely led to higher demand for electrical equipment. The government, as part of its Aatmanirbhar Bharat mission, is encouraging Indian companies to fulfil this rising demand for the equipment by producing locally. The government intends to set up three manufacturing zones around the country for electrical companies to manufacture products and components, which are presently imported.

India has set ambitious targets for its electricity sector, including 450 gigawatts (GW) of renewables by 2030, representing a total of 55 per cent of planned capacity. To achieve such ambitious renewable targets and sustain economic growth goals, the crippled power distribution sector must be made profitable. Announcements in the budget are aimed to achieve it. However, the result will depend on the actual implementation of these schemes on the ground. 

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