New Delhi: India’s power sector may be in a worse state than earlier thought, with the Centre coming across instances of states failing to pay struggling distribution utilities for free power supplied to farms and unmetered consumers, though states claimed to have made substantive payments.

Free electricity to farmers and other such subsidies have burdened power distribution companies (discoms) and generators in India, where average aggregate technical and commercial losses are at 21.4%, among the highest in the world.

Even as soaring subsidy costs have left state governments with little money to spend on welfare programmes, they are reluctant to end free power supply, fearing a political backlash.

As the supply of power to the agricultural sector is unmetered, most utilities write off losses because of transmission and distribution as agricultural consumption.

According to government documents reviewed by Mint, “96.4% of the subsidy was reported as received. However, it was noted that the subsidy is underpaid due to inadequate compensation against unmetered/agri consumers".

The Electricity Act, 2003, states that subsidy declared for any consumer or class of consumers must be paid by the state government in advance to the distribution licensee. However, this has not been practised by state administrations. As electricity is on the concurrent list, it is for states to ensure quality, reliable and affordable electricity to consumers.

Discoms have so far been the weakest link in the electricity value chain. Poor payment records of state-owned discoms have not only affected power producers adversely, but have also contributed to stress in the banking sector.

“There is a huge stress in the Indian power sector that is weighing down the economy," said a senior Union government official, requesting anonymity.

To ensure financial discipline, the central government wants state power regulators to go for regular electricity tariff revision and put an end to creation of regulatory assets, which have ballooned to ₹1.5 trillion. A regulatory asset is created when the regulator accepts certain expenditures but does not factor them in while determining tariff. These expenditures are to be adjusted in future tariff and, in the interim, are accounted for as regulatory assets.

“Some states have not been increasing tariffs even to the level of normal inflation, which is leading to the tariffs not being reflective of true costs," states one of the documents reviewed by Mint.

The central government also plans to overhaul the way the power sector is financed and subsidies are delivered. This includes a proposed direct disbursement of power distribution subsidies to consumers such as farmers by leveraging their unique identity numbers.

A power ministry spokesperson did not respond to queries emailed on Wednesday evening.

In her budget speech, finance minister Nirmala Sitharaman urged states and Union territories to replace conventional electricity meters with prepaid smart meters in three years to reduce distribution losses.

India’s proposed distribution reform scheme, tentatively named Atal Distribution System Improvement Yojana, aims to cut electricity losses to below 12%. The ₹2.86 trillion scheme in the works hopes to ensure uninterrupted power supply and may involve privatizing state-run discoms and multiple supply, network and distribution franchisees.

To diffuse an imminent crisis, the Centre is also considering an initiative to let defaulting state governments clear their outstanding dues to discoms through a dozen monthly instalments, Mint reported on 28 January.

State government departments have the lion’s share of the ₹73,122 crore in total dues at the end of November. The push comes in tandem with the finance ministry’s proposals to withhold permission to defaulting states to borrow to the extent of electricity losses not funded by their respective governments.

To ensure timely payments by states to power producers, the central government has already made it mandatory for distribution companies to offer letters of credit (LCs) as part of the payment security mechanisms in power purchase agreements. However, while states have offered LCs, their old arrears have not been cleared.

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