Union Budget 2026 may refocus power sector reforms with discom privatisation, RDSS Phase-II and smart meters

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• Budget 2026 may push privatisation of state-owned power discoms
• RDSS Phase-II to focus on smart meters and stricter performance conditions
• Electricity Amendment Bill expected post-Budget to boost distribution reforms

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The Union Budget 2026 is expected to place electricity distribution reforms back in focus, with the Centre likely to outline its approach to privatising more state-owned discoms, alongside a possible second phase of the Revamped Distribution Sector Scheme (RDSS) aimed at faster rollout of smart meters across the country, officials familiar with the matter told Moneycontrol.

The proposed policy thrust comes against a backdrop of modest improvement in discom finances. According to government data shared on January 18, power distribution companies collectively posted a profit after tax of ₹2,701 crore in FY25, their first sector-wide profit in years after deep losses, even as structural challenges persist in parts of the distribution network.

Officials say this improvement has been supported by better billing and collection discipline, reduction in outstanding legacy dues and tighter performance monitoring, though the recovery has been uneven across states. Government data also showed that aggregate technical and commercial (AT&C) losses at the national level declined from 21.91 percent in FY21 to about 16.16 percent in FY25, reflecting gradual operational improvements.

Privatisation back on the table

Despite the improvement in aggregate discom finances, officials said that the turnaround masks wide inter-state disparities, with several utilities continuing to report high losses, weak operational performance and a heavy debt overhang, keeping the case for private participation on the reform agenda.

Outstanding debt of state-owned discoms is estimated at over Rs 6 trillion, according to government and regulatory data, much of it accumulated through years of delayed subsidy payments, tariff gaps and short-term borrowings.

“This legacy debt, coupled with uneven efficiency gains, limits the ability of many utilities to sustain improvements without structural changes,” said an power ministry official.

In the Budget 2026, the Centre is likely to push for private participation in electricity distribution, including privatisation or long-term franchisee models in select states, officials said.

“The Centre has been encouraging states to explore options such as input-based distribution franchisees and public-private partnership models to improve efficiency, particularly in high-loss pockets,” the official added.

As reported earlier by Moneycontrol, the government has been examining next-generation power sector reforms aimed at moving away from periodic financial bailouts, with privatisation being discussed as a structural intervention where scheme-based improvements have fallen short.

RDSS Phase-II, sharper conditionalities.

To support the broader reform push, the Centre is likely to bring a Phase-II of the Revamped Distribution Sector Scheme (RDSS) with tighter performance-linked conditions and a greater focus on measurable outcomes, a second power ministry official said. While the current scheme links funding to loss reduction and operational milestones, progress has varied significantly across states.

Officials indicated that the next phase could place stronger emphasis on financial sustainability, governance reforms and reduction in state guarantees, rather than only infrastructure creation.

Smart meters as a key reform lever

Smart metering is expected to feature prominently in the proposed RDSS Phase-II. Under the current scheme, 20.33 crore smart meters have been sanctioned, of which around 4.76 crore have been installed so far, according to a recent government data.

The government has repeatedly highlighted smart meters as critical to improving billing transparency, reducing commercial losses and enabling prepaid metering and remote monitoring. “A faster rollout, supported by central funding and private participation, could improve cash flows and operational efficiency, particularly in chronic loss-making areas,” the second official said.

Electricity Amendment Bill likely post-Budget

In parallel, the government is expected to bring the Electricity (Amendment) Bill to Parliament after the Budget to revive long-pending distribution reforms. The proposed legislation is expected to provide a framework for greater competition in distribution, consumer choice and clearer accountability norms for discoms, though its final contours and timelines will depend on consultations with states and other stakeholders.

“A combination of calibrated privatisation, a reworked RDSS framework and wider adoption of smart metering could gradually improve the financial sustainability of the distribution segment, even as reforms are expected to progress incrementally given sensitivities around tariffs, state control and labour issues,” the official said.