Subsidies for state-run power distribution companies are projected to rise to a staggering Rs 60,000 crore by the end of this fiscal even after benefits from financial restructuring, says a research report.
Besides, the power sector remains increasingly vulnerable to both the rupee-dollar exchange rate and international coal prices mainly due to rising dependence on overseas coal to fire generation plants, rating agency ICRA said in its report.
ICRA said on Wednesday it expects “the overall absolute level of subsidy dependence for power distribution companies (discoms) on an all-India basis to increase to estimated Rs 60,000 crore for the 12-month period ending March 31, 2014.” The government is implementing a financial restructuring package for discoms in the wake of their precarious financial condition, which has also raised concerns of defaults.
A key reason for the poor financial health of discoms is the mismatch between the cost of generation and the rate at which electricity is supplied.
The projected Rs 60,000 crore subsidy comes even after the implementation of the restructuring package and anticipated improvement in overall cash flow/liquidity profile of utilities over the next 2-3 years.
According to ICRA, a major factor for the projected increase in subsidies is a rise in the approved cost of power.
State Electricity Regulatory Commissions (SERCs) have approved the higher costs on account of increases in power purchase and other fixed expenses.
Even though tariffs have been hiked for subsidised consumers, ICRA said that in states such as Rajasthan, Tamil Nadu and Uttar Pradesh, the respective governments “have borne the burden of tariff hike for such consumers.”
“Another factor would be continued low tariffs for certain sections of consumers (mainly agricultural consumers) which remain heavily subsidised, including a free power policy in some states,” the agency noted.
SERCs in as many as 21 states have issued tariff orders for FY 2013—14, with resultant hikes of 5-14 per cent.
Noting that progress in rationalisation of electricity tariffs has been slow, the report said, “Utilities in many states continue to delay filing for fuel and power purchase adjustment petitions.”