Performance Metrics Of Discoms Improving But Long-Term Challenges Persists: Moody’s

New Delhi, May 23 (KNN) India's state-owned power distribution companies (discoms) are demonstrating meaningful progress in financial and operational performance, offering near-term relief to power generators — but deep-seated structural weaknesses continue to pose risks to the sector's long-term stability, according to a new report by ratings agency Moody's.

Progress on Key Metrics

Moody's credited central government reforms and sustained policy support for driving measurable improvements across the distribution sector, reported ET.

The gap between the average cost of supply (ACS) and average revenue realised (ARR) narrowed sharply from Rs 0.69 per unit in FY2020–21 to just Rs 0.06 per unit in FY2024–25. Over the same period, aggregate technical and commercial losses fell from 21.9 per cent to 15 per cent.

The Late Payment Surcharge (LPS) framework introduced under the Electricity (Late Payment Surcharge) Rules, 2022 has delivered a particularly tangible shift in payment discipline. 

Receivable days for rated renewable energy projects dropped from 223 days in FY2021–22 to 91 days in FY2024–25 — significantly easing working capital pressures for generators, especially renewable energy developers who remain heavily dependent on state discoms as offtakers.

Structural Weaknesses Remain

Despite the progress, the scale of accumulated losses across the distribution sector remains daunting. Sector-wide accumulated losses are estimated at approximately Rs 6.5 lakh crore — nearly 2 per cent of India's FY2025 GDP — underscoring how much ground still needs to be covered.

The picture is also far from uniform across states. Around 20 of 31 states and union territories still report ACS-ARR gaps above the national average, including key renewable energy offtake states such as Karnataka and Maharashtra. Only Gujarat and West Bengal recorded accumulated surpluses in FY2024–25. 

The sector's growing dependence on external liquidity support adds another layer of concern, with borrowings from policy lenders Power Finance Corporation and REC Limited rising to Rs 7.26 lakh crore in FY2024–25.

State discoms account for roughly 59 per cent of contracted capacity across Moody's-rated power projects in India, with Karnataka, Andhra Pradesh, Madhya Pradesh, and Maharashtra representing the largest concentrations of exposure.

Headwinds on the Horizon

Looking ahead, Moody's cautioned that the gains achieved could face fresh challenges. Rising fuel costs linked to geopolitical tensions in West Asia, combined with the incremental costs of integrating battery storage and managing renewable energy balancing, could test operational resilience in the coming years.

Proposed amendments to the Electricity Act, 2003 were flagged as a potential path forward, with the possibility of enabling cost-reflective tariffs, improving subsidy transparency, and introducing greater competition in electricity distribution — measures that could help place the sector on a more sustainable footing.

(KNN Bureau)