Representative image of a power plant.
Credit: iStock
The fate of the power sector has seen an evolution, with multiple schemes announced over more than two decades, furthering the sector’s objectives. Of the entire value chain, the distribution sector has been the most difficult to solve, given the political and customer sensitivity to tariffs. The distribution reforms have been slow to come by, with meaningful momentum picking up post-June 2022 after the introduction of the LPSC rules. Given the pace of slow reforms, the sector had accumulated losses of INR 6.59 trillion as of FYE23, with debt of INR 6.72 trillion and an annual PAT loss of INR 610 billion.
However, the sector dynamics post-FY23 began to morph after the strict implementation of the LPSC rules, with annual losses declining to INR 255 billion as of FYE24, and the ARR-ACS gap moderating to INR 0.15/kWh in FY24 (FY23: INR 0.43/kWh). Dues to generators declined to ~130 days from 180 days in FYE21. The set of reforms outlined under the LPSC rules ensured timely increases in tariffs and support from state governments, with timely disbursal of subsidies.
Recently, the Union Ministry of Power came out with the Draft Electricity (Amendment) Bill, 2025, which replaces the Electricity Act, 2003, addressing the long-pending structural issues negatively impacting the distribution sector (discoms). The key issues plaguing the discoms have been: (i) cost-reflective tariffs, (ii) significant creation of regulatory assets with no liquidation plan, (iii) monopoly-like status with limited competitive pressures for improvement in quality of supply, (iv) heavy cross-subsidization across consumer categories, (v) poor and dilapidated infrastructure with limited investments in new capex, and (vi) significant delays in tariff filings/approvals and backlog of cases at the regulatory bodies.
The current amendment needs to be seen in conjunction with the Supreme Court order dated 6 August 2025 in the case of BSES Rajdhani and the Union of India, and the Smart Metering initiative launched in 2023. The SC order stated two key points: (i) regulatory assets (RA) to be limited to 3% of the annual revenue requirement, and (ii) liquidation of fresh regulatory assets within a period of 3 years, and past RA within a period of 4 years. The Smart Metering initiative solved the capex burden by moving it out of the books of the discoms and transitioning to opex, requiring minimal upfront investments.
Combining the proposed amendments and the SC judgment, it becomes amply clear that all of the above structural issues are being targeted for addressal. The biggest change would be the increased competition through distribution network sharing, which would allow the content-and-carriage model to be implemented without duplication of the network and burdening the customers. Also, new players could choose their source of power, free from past long-term PPAs, which could be largely renewables, and benefit consumers given the relative cheapness of such power compared to conventional power. Moreover, post-competition, generally, the operating metrics and cost of servicing improve meaningfully, as observed in other areas where parallel licensing is working. The Act also proposes to impose penalties for non-adherence to the Renewable Power Purchase Obligations in monetary terms at INR 0.35/kWh to INR 0.45/kWh to ensure compliance.
The second change proposed is the formation of an Electricity Council, which would be chaired by the Union Minister of Power with state Electricity Ministers as its members. This would ensure cohesive working, consensus on reforms, and coordination towards effective implementation, given that electricity is a concurrent subject.
The third change is the expansion in the number of Appellate Tribunal members to seven from three, to address the rising backlog of cases and ensure timely adjudication. Moreover, a timeline of 120 days has been proposed for the disposal of proceedings before the appropriate commission. Also, the new regulation proposes suo motu determination of tariffs by the State Electricity Regulatory Commission in case the discom does not file the tariff.
The fourth one ensures manufacturing and logistics competitiveness through a reduction in the level of cross-subsidisation these sets of consumers bear. This is in line with the government’s Make in India initiative and overall logistics cost reduction to ensure global competitiveness amid rising global protectionism.
The above changes would go a long way toward addressing the most structural issues facing the sector and would ensure the financial and operational viability of the entire value chain.
[The writer is the Director, India Ratings & Research (Fitch Group)]
Vivek Jain.