TANGEDCO sees red amid lockdown blues

Amid the financial crisis that emerged during the months-long lockdown to limit the spread of Covid-19, Tamil Nadu Chief Minister Edappadi K. Palaniswami in a letter to the Centre late April, sought a bail-out package for the Tamil Nadu Generation and Distribution Company (TANGEDCO). As of FY 2019, the total debt of the electricity utility was over ₹1,01,294 crore. To put this in perspective, this was the state’s entire debt in 2011 and approximately 6% of its GDP in 2019.

TN’s electricity tariffs have not been revised since 2017, but power purchase costs have steadily risen over the years. In 2018-19, the resultant gap had crossed ₹2 per unit, resulting in a loss of ₹9,256 crore. TANGEDCO’s losses have been higher in the past. In 2014-15, its annual losses were over ₹12,750 crore before the Regulatory Commission intervened and revised tariffs. Annual losses were then reduced to ₹5,750 crore for 2015-16 and to ₹4,350 crore in 2016-17.

In January 2017, TANGEDCO signed a tripartite agreement with the Centre and state government to implement the Ujwal Discom Assurance Yojana (UDAY) scheme that sought to reduce utility debts. But, with rising costs and non-revision of tariffs thereafter, the implementation of UDAY proved largely ineffective with losses doubling the next year and the debt continuing to rise.

TANGEDCO’s growing debt has resulted in its credit rating being downgraded. With a credit rating of BBB and a negative outlook, the utility will find it difficult to raise additional funds needed to ensure uninterrupted power supply.

The Electricity Subsidy Regime Electricity subsidies have been a feature in TN’s political and socio-economic movements since the 1980s, with both dominant political parties promising free power to farmers. Over the years, more consumer categories have actively lobbied for electricity subsidies.

Today, TN’s high agricultural production could partly be attributed to the free supply of power. With rise in agricultural production, the sector’s electricity demand has also increased. One in five units of low-tension (LT) electricity supplied by TANGEDCO is said to be consumed by the agricultural sector today. While this has positive impacts for the sector and the state, it has come at a significant cost to TANGEDCO, and its ability to pay power generators and modernize its grid infrastructure.

In 2016, TN decided to provide 100 units of electricity free-of-charge to every domestic customer. As in the case of free power to agricultural consumers, such subsidies are to be paid by the state, by cash transfers to TANGEDCO. Although these transfers have been increasing, it hasn’t been adequate to cover the loss in revenue suffered by the utility.

Subsidy provisions may have a strong political rationale, but if they don’t compensate the loss in revenue, the resultant impact on the financial sustainability of the utility can be severe. TANGEDCO is an example of an electricity utility being hit by these calculations.

COVID-19 Impacts The lockdown since March 24, has affected close to 44,00,000 commercial and industrial (C&I) establishments in TN, and by extension TANGEDCO’s operations and revenues. Within a week, the utility is estimated to have lost nearly ₹1,260 crore. Further, its working capital has been strained, as industrial customers have sought a three-month moratorium to pay electricity bills. The absence of physical meter-reading has also resulted in domestic customers paying the same amount as the last billing cycle.

Even when C&I activities increase, revenue recovery may not be as forthcoming, considering TANGEDCO was already facing gradual migration of its high-paying consumers to procure power from captive plants or Open Access (OA) contracts.

Turning TANGEDCO Around The Centre has promised some relief to electricity utilities in its economic stimulus package, but this is primarily focused on helping clear their dues to power transmission and generation companies. While TANGEDCO awaits payment of promised subsidies and other dues, its dependence on external loans has been increasing. To reduce this dependence and initiate a financial turnaround, the utility should bring its current tariff in line with the National Tariff Policy.

Additionally, without raising tariffs (which may be difficult given the upcoming state elections), several measures could alleviate TANGEDCO’s stress.

• Reducing power purchase costs by non-curtailment of cheaper Renewable Energy (RE): With most of the electricity demand during the lockdown coming from households, solar photovoltaic (PV) can reduce power purchase cost, if it is not curtailed. While the pooled cost of power purchase for 2019 approved for TANGEDCO stands at ₹4.07/unit, the solar power tariff approved by TN Electricity Regulatory Commission is ₹3.04/unit.

• Implementing the Kisan Urja Suraksha evam Utthaan Mahabhiyan (KUSUM) Scheme to reduce the financial impact of supplying free power to agricultural customers: As part of the first phase of the scheme, the state was sanctioned to install 17,500 stand-alone and 20,000 grid-connected solar pump sets. The KUSUM scheme is expected to benefit TANGEDCO by reducing the quantity and cost of subsidized power supplied to the agricultural sector, potentially lowering the average cost of supply (ACOS) of ₹5.85; and benefit the state by reducing its contribution towards tariff subsidy which was over ₹8,000 crores in its latest budget.

• Adopting the DISCOM Stimulus Scheme: The scheme promises to provide loans, backed by state guarantees, to help repay dues to transmission and generation firms. It also directs the central generating stations to give rebates to DISCOMs, which is to be passed on to consumers. TANGEDCO should use these rebates to reduce the gap between ACOS and revenue from electricity sales.

• Implementing Integrated Resource Planning (IRP): For the medium-to-long term, TANGEDCO should undertake a transparent IRP exercise to help utilizing energy resources (preferably clean) more efficiently and guide the state on impending or avoidable capital investment.

It may seem daunting, but TANGEDCO could leverage the right strategy that improves financials, while simultaneously helping TN transition to a sustainable energy pathway.