Why public listing of power Discoms is a trillion Dollar opportunity, ET EnergyWorld


The Indian power system, one of the largest in the world, has been growing at a rate of over six percent since the last decade. World class management practices are being followed across the business value chain, starting from generation, transmission and distribution of power. This has led to all households and commercial establishments in the country getting connected to the grid, besides closing the gap between energy demand and supply. The current installed capacity (400 GW) as well as energy generation (1600 BU) are expected to double by the end of this decade, concomitant with the envisaged GDP growth of the country.However, power distribution, the tail end of the sector, is besieged with certain challenges. Distribution utilities (or, discoms), servicing the end-consumers, find it difficult to operate on sound economic principles, impacting their financial health. They find it difficult to invest in infrastructure improvement and enhance their management skills. This creates a vicious cycle, leading to high technical and commercial losses. Delayed payments from discoms to generating companies (both conventional and renewables) makes it difficult for the latter to service their debt obligations as well as pay for the fuel.Taking cognizance of this situation, the government has been undertaking several reform measures by way of dedicated programmes (including APDRP, UDAY and RDSS) to enhance the viability of the sector and operate discoms on commercial principles. Even the fifteenth Finance Commission has supported power reforms by way of enhanced borrowing limits for the reforming states.

Electricity is a concurrent subject under the Indian constitution. Power being considered as a merit good, state governments are sensitive to tariff revisions, as it directly impacts their citizens (read voters). Though the performance of private discoms has been better compared to government-owned discoms, most states have been indifferent to their privatization.

A possible solution to enlist the support of state governments as well as ordinary people is by making them co-owners in the discoms.

As has been the case with government owned power generating and transmission companies, which, after getting listed on stock exchanges, are performing well, with regular dividend payouts to the shareholders, efforts can be made to unlock the value of the state-owned power distribution companies as well. It may be noted that some urban local bodies have successfully raised municipal bonds, while some of the state PSUs have been listed too.

With annual sales of 1400 billion electrical units, at an average price of INR 6 per unit, the transaction value of the entire distribution sector comes to be INR 8400 bn (over US$100 billion).

For yet to be listed companies (like e-commerce firms and start-ups), valuation is made by assigning a certain multiple to their revenue. This number depends upon the future market scenario and the expected dominance of the company in the field.

Energy, being a pre-requisite for economic development, coupled with the ongoing electrification efforts, discoms, as the last-mile delivery agents, are extremely important entities. They enjoy a near monopoly due to their unique ownership structure, sectoral regulations and capital requirements of the sector.

Therefore, for valuation of discoms, a multiple of ten can be considered. Using this value, the market capitalization of discoms shall cross a trillion dollars. Even with a 25% public listing of shares, the realization shall be over $250 billion.

Towards sharing of prosperity with the citizens, a certain minimum percentage of shares can be earmarked for all metered consumers. As shareholders of a discom, they would want it to operate on sound business principles and would be prompt in payment of bills. For not so affluent sections of the society, who may have a challenge to arrange funds for purchase of shares, a staggered payment mechanism may be designed (similar to the bill discounting scheme of Ujala), wherein, monthly bills can include charges towards shares. The Life Insurance Corporation of India (LIC) earmarked 10% of its shares for the policy holders in its initial public offering.

State governments would become the owning entities of the discom companies. Their buy-in can be obtained by providing them a certain share of the capital raised, with a mandate to use for upkeep of discom. Central government has been supporting discoms, both in terms of cash and kind (subsidy as well as institutional support). They can be offered certain shareholding in the discoms, in lieu of these services.

A lot of foreign entities, including private equity players, pension funds and sovereign wealth groups, have invested in the Indian renewable sector. Low tariffs discovered in solar and wind auctions, have reduced their effective returns. The generation sector has moved in from an era of fixed returns (Section-62 of Electricity Act) to open auctions (section-63). However, the power distribution sector is still eligible for fixed returns on capital.

One of the elements in the Annual Revenue Requirement (ARR) filed by discoms is regulated rate base, RRB, which is used to calculate the return on capital employed. RRB includes the original cost of fixed assets, capital employed on assets added during a particular year, besides the working capital. It discounts depreciation, consumer contribution and capital subsidies. Tariff Regulations allows a fixed value for the returns on RRB. This means that all capital investments in distribution assets are eligible for fixed (and guaranteed) returns.

Perusal of select ARRs shows that the fixed cost of equity has been in the range of 14-16%. Fixed and remunerative returns shall entice domestic as well as global financial institutions to invest in the distribution sector.

The Ministry of Power rates all the sixty discoms of the country on an annual basis, using a range of commercial, technical, and institutional parameters. The Department for Promotion of Industry and Internal Trade (DPIIT), can work with the Ministry of Power, to identify some of the better performing discoms towards public listing.

This unique concept of ‘Social Privatization’ shall enlist greater participation of the state governments as well as consumer groups, besides enhancing the performance of discoms on a sustainable basis.

[This piece was written by Dr Sapan Thapar, a Delhi-based energy consultant, and Former HoD, TERI School of Advanced Studies]

  • Published On Jul 3, 2023 at 09:50 AM IST

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