Financial deficit in power distribution sector rose 79.5% in FY23: Power Ministry

Non-reflective power tariffs led to widening of ACS-ARR gap.

The financial deficit in India's power distribution sector widened to at least Rs 79,000 crore in FY23 from Rs 44,000 crore in FY22, according to the 12th Annual Integrated Rating and Ranking of Power Distribution Utilities released by the government on March 11.

The increase in deficit was primarily driven by an eight percent increase in the gross input energy and substantial rise in power purchase costs during the year, the report stated.

The financial deficit, also termed the absolute cash-adjusted gap, is a direct culmination of various driving factors, such as cost recovery, tariff revisions, operational aggregate technical and commercial (AT&C) losses, regulatory environment etc. As a result, it remains one of the most important indicator of the distribution sector’s health.

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The same is also known as 'ACS-ARR gap', which is the gap between Average Cost of Supply (ACS) and the Average Revenue Realized (ARR). The absolute gap is calculated on a cash adjusted basis, taking into account actual cash receipt of all subsidies and financial assistance from the government, along with actual cash collection against the revenue booked.

ACS-ARR gap rose to 55 paise per unit from 33 paise

The report stated that on a per unit basis, the ACS-ARR gap increased from
33 paise per unit in FY22 to 55 paise per unit in FY23.

In December 2022, the Ministry of Power issued the Electricity Amendment Rules, mandating the implementation of automatic pass-through of fuel and power purchase costs by regulators. Many states have since adopted these rules, enabling them to pass on increases in power purchase costs
to consumers within the same year, rather than awaiting true-up orders.

According to the report, automatic pass through of fuel costs was implemented for 39 out of 72 utilities in FY23. States which did not implement the same were Andaman & Nicobar Islands, Andhra Pradesh,
Arunachal Pradesh, Bihar, Chandigarh, Haryana, Himachal Pradesh, Jharkhand, J&K, Ladakh, Lakshadweep, Meghalaya, Manipur, Nagaland, Rajasthan, Sikkim, Tamil Nadu, Tripura, Telangana, and Uttar Pradesh.

"Consequently, despite a substantial increase in power purchase costs during FY23, consumer tariffs did not adequately reflect these changes. This discrepancy substantially contributed to the widening of the ACS-ARR Gap for many utilities," it stated.

It also added that while the ACS-ARR gap widened at a national level, some states were actually able to improve their gaps. State discoms from five states: Madhya Pradesh, Andhra Pradesh, Bihar, Telangana and
Odisha showed the most improvement in absolute cash-adjusted gap largely due to higher subsidies disbursement by state governments (except Odisha) and better cash collections (except Telangana). Together, their collective absolute cash-adjusted gap reduced by Rs 19,000 crore from the year-ago period.

Average power purchase costs rose by 71 paise

Historically, power demand grew at 4.3 percent CAGR between FY14 and FY20, in contrast to 8.9 percent CAGR between FY21 and FY23. This considerable rise can be attributed to sustained economic growth, strong emphasis on domestic manufacturing sector, higher infrastructure spending and rising incomes leading to higher domestic power consumption. This trend was also noticeable in Commercial and Industrial (C&I) sector, where electricity sales surged by over 18 percent
CAGR over FY21 to FY23.

The report found that the growth in power demand and global geo-political challenges resulted in an unprecedented increase in national power purchase costs of 71 paise per unit in FY23, as compared to the marginal increase of 4 paise / kWh in FY22 v/s FY21.

This increase in power purchase costs was driven by rise in volume of imported coal, rise in prices of imported coal, and surge in power exchange price driven by the unprecedented power demand.

"We are persuading discoms to enter into long-term power purchase agreements (PPAs). This will bring down power purchase costs and moderate electricity rates," said RK Singh, Union minister for power and new and renewable energy during the launch of the report on March 11.