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Addressing the Payments Problem of Electricity Distribution Licensees

The payment delays by the distribution licensees to power generators can be best addressed through smart prepaid meter installations, part of the recently announced Ministry of Power’s revamped distribution sector scheme, supplemented with the creation of extra currency by the central bank.

A perennial problem faced by suppliers to electricity distribution companies (licensees) (DISCOMs) in India is the payment delays. There has not been any year wherein the DISCOMs have been in a position to pay to suppliers within the due date of their bills. The principle reason noted by the Central Electricity Authority (CEA) in its report of the committee on delayed payment by the DISCOMs to the generation companies (GENCOs)/independent power producers (IPPs) (CEA 2019) is that the revenue realised by the DISCOMs is much lower than their costs, as captured by the gap in average cost of supply (ACS) and average revenue realisation (ARR). To mitigate the impact of gap between revenue and expenditure, the DISCOMs either try to take loans to meet the costs or defer some expenditure, including payments to the generating companies. The report noted that the major factor that contributes to the ACS–ARR gap is the absence of periodic tariff revision. Even when the tariff is revised, the inc­rease is not commensurate with the legi­timate costs.

The report also observed that the DISCOMs face severe liquidity problem as the annual revenue requirement and tariff determination process is on accrual basis, while in reality the cash flow is much less. This assessment of the CEA is not new, and to support the DISCOMs, the Government of India (GOI) has introduced, from time to time, various pro­gram­mes like accelerated power dev­e­lopment programme (APDP), accelerated power development and reforms progr­amme (APDRP), restructured accelerated power development and reforms progr­amme (RAPDRP), Integrated Power Deve­lop­ment Scheme (IPDS), Ujjwal DISCOM Assurance Yojana (UDAY), and, recently, the Revamped Distribution Sector Scheme (RDSS)—a reforms-based and results-linked scheme. All these programmes, des­pite being in vogue since nearly two decades, fell short of achieving the desired outcomes in terms of improved aggregate technical and commercial (AT&C) losses and better finances of DISCOMs. It needs to be seen how the latest ref­orms package works out.

The Unpaid Dues Problem

The PRAAPTI portal (PFC Consulting Ltd nd) gives an overdue outstanding figure of around `1,03,331 crore at the end of March 2022 for central sector generators, renewable generators, independent power plants, transmission licensees, and state generating plants. The portal filing being voluntary does not cover the receivables of many state transmission utilities or state GENCOs, other suppliers to DISCOMs, all IPPs, generators, etc. Hence, the value of `1,03,331 crore is an understatement of the true extent of the problem. The best possible gauge of the all-India unpaid dues by DISCOMs to generators is reflected in the Report on Performance of State Power Utilities issued by the Power Finance Corporation (PFC). The latest annual report is for financial year (FY) 2020. The last five years payable for the purchase of power and fuels from the PFC reports is produced (Table 5, p 17).

It can be inferred (Table 1) that the ­actual dues outstanding against power purchase and fuel cost are increasing by an average compound annual growth rate of 11% per annum and as on 31 March 2020 stood at `2,59,071 crore. (This does not include the outstanding to transmission licensees, other suppliers/vendors, etc.) The ensuing FY 2021 is going to be worse, given the impact of COVID-19 on DISCOMs’ fina­ncials.

Therefore, the problem at hand is very serious that when set in the context of universal access to electricity—cost versus consumers’ ability to pay for electricity, cheaper power for economic growth, and the price of transition to newer sustain­able energy technologies—would require a reconsideration of the present atte­mpts to resolve it. The current approaches of retail tariff hikes, subsidy from state government, or loans from banks may well fall short of resolving the ACS–ARR gap and the consequent delayed payment problem. The need of the hour is a reasoned shift in this method to solve this problem. The present article suggests a solution to inc­rease the ARR in order to reduce the ACS–ARR gap.

Methods to Increase the ARR

Increase in retail tariff—comparing the cost of electricity: A comparison of absolute consumer electricity prices ­(Table 2) from 2010 to 2020 in India, China, and the United States (US) shows the absolute retail electricity prices to be in the range of 8.16 US cents/kilowatt hour (kWh) to 10.66 US cents/kWh. An absolute price comparison does not consider the affordability of electricity to consumers, which can be assessed after considering country-wise per capita inc­ome (per capita gross domestic product [GDP]) and per capita electricity consumption.

In Table 2, the details of GDP per capita, per capita electricity consumption, and average retail electricity price are given for China, India, and the US. The electri­city price index is (retail electricity price × per capita electricity consumption)/(GDP per capita) × 1,000 multiplier. The electricity price index captures the impact of absolute electricity price, per capita electricity consumption, and per capita income for the three countries. It is basically a scale to measure the aff­or­dability of electricity; the higher the index, the lesser affordable the electricity and vice versa.

The electricity price index of India is much lower than that of China except in 2020 wherein China reduced its industrial electricity tariff to stimulate economic growth. The US has half the electricity price index compared to China or India, implying that electricity is the most affordable in the US as against China or India. While it may not be prudent to compare a developing country with a developed country like the US, the impact of per capita income on per capita electricity consumption is quite pronoun­ced in all the three countries. China has a higher per capita inc­ome than India but lower than the US and thereby higher per capita electricity consumption than India but lower than the US. India has the lowest per capita income compared to both the countries and hence the lowest per capita electricity consumption. The US has the highest per capita electricity consumption due to higher per capita income compared to India or China. There is, therefore, a ­direct correlation bet­ween per capita ­income and per capita electricity consumption. China has, on average, higher electricity price than India but five times the per capita income and hence four to five times the per capita electricity consumption. Hence, for India to increase its per capita electricity consumption, it would have to rapidly increase its per capita income (or substantially reduce its electricity cost, which is not possible).

In China, the retail electricity tariff is stable and has recently been reduced for industrial consumers to stimulate economic growth. In fact, their electricity tariff as on 2020 is lower than 2010 (-11.5%). In the US, the corresponding difference (increase) is merely around 8.5%. Compare this with India where the difference (increase) of power tariff in those same years is around 15%. Despite China and the US having much higher per capita income than India (5 to 30 times), their electricity tariffs for 2020 are only around 4% to 13% higher than India, thereby indicating the need for maintaining benign prices despite high income levels.

If India seeks to fully meet the DISCOMs’ power purchase and fuel payables obli­ga­tion through tariff increase only (Table 3), it would require a huge hike of up to 44% for FY 2020.

This would raise the electricity price index to a massive 89 (considering 44% tariff hike), making it higher than even China in 2010 when the latter had nearly four times India’s per capita income and the highest electricity price index during the 10-year period from 2010 to 2020. Such high electricity tariff hikes are, therefore, unaffordable. It also leaves limited room to state regulators on tariff manoeuvrability, explaining to a certain extent the infrequent tariff revisions des­pite the worsening financial position of DISCOMs; sustained tariff hikes does not seem to be an affordable option.


Situation of state government finances and subsidy support: The situation of gross fiscal deficits (Table 4) of various states in the country shows them to continuously increase with a compound annual growth rate of 14% per annum (derived from Table 4 data) from FY 2016 to FY 2021.

A large part of this deficit is financed by market borrowings through bonds that need to be repaid in the future. Iyer (2020), in a news report on state finances by the Reserve Bank of India, inf­orms that the states’ debt redemption is set to rise sharply and double after 2026. It further mentions that with states res­orting to increased borrowings to meet the bond redemption, it is likely that they are headed towards a debt trap. Due to the poor fiscal position of the states, they face difficulty in meeting the subsidy ­obligation towards the DISCOMs. Delay in subsidy payment and lesser subsidy payments are also rampant. As a result, expecting continuous meaningful sub­sidy support by the state governments to the DISCOMs would be challenging.

Bank Loans

Bankability of distribution utilities: As on 31 March 2020, the net worth of all the DISCOMs was negative—`36,792 crore (PFC 2021). Accumulated losses of distribution licensees are also increasing at a compound annual growth rate of around 6% per annum (estimated from Table 5) from FY 2016 to FY 2020. The accumulated losses as on 31 March 2020 stood at a staggering `5,07,416 crore (Table 5).

Negative net worth utilities with huge losses are not bankable without the state governments’ guarantee. Atmanirbhar Bharat loans from PFC (Rural Electrification Corporation Limited) had asked for state governments’ guarantee against the loans given to DISCOMs. With limited fiscal space of states to manoeuvre, their ability to guarantee loans on behalf of DISCOMs would be very limited, thereby res­tricting the DISCOMs’ ability to borrow.

It can, therefore, be inferred from the above that there is limited space for electricity price increase and the ability of state governments to financially support DISCOMs. The desired ARR increase would, therefore, remain elusive.

The New Paradigm

The quantity theory of money: The quantity theory of money (Froyen 2018) is the equation of exchange—an identity relating the volume of transactions at current prices to the supply of money times the turnover rate of each unit of currency. The turnover rate for money, which measures the average number of times each unit of money is used in the transactions during the period, is called velocity of money. In the form used by American quantity theorist Irving Fisher, this identity is expressed as:

MVt = PtT … (1)


M is the quantity of money

Vt is the transaction velocity of money

Pt is the price index for the items traded

T is the volume of transactions

The idea behind the above equation (Werner 2005) is that the total value of transactions (PT) must be as large as the money used to pay for these transactions. In practice, the statistical data (Werner 2005) for M and P can be found, V is the residual or derived, thus the data on T are necessary. But such data on T do not exist. However, countries compile the national income accounts (NIAs). Acc­ording to the NIAs (Werner 2005), one can express the same aggregate figures to the right hand side of the equation either as national income, output, or expenditure. Werner (2005) informs that many Cambridge economists replaced PT with PY, due to the data insufficiency of T, yielding the following widely used quantity equation.

MV = PY … (2)

Here P stands for the price level, Y for output (or income) measured in volume terms, that is, real GDP; so P times Y is nominal GDP; M stands for the amount of money in the economy, the “money supply”; V stands for “velocity of money,” which is the number of times the money supply is “turned over” in the time ­period of observation, or the number of times money M is used for transactions; so M times V is the total effective money supply. The equation above, therefore, simply says that the nominal national income or output equals the nominal amount of money that is actually used in the economy. In other words, the money going round in a year must buy a year’s national income.

The national income of a country, measured in nominal GDP, is the sum ­total of the contribution of different sectors, manufacturing and/or services, to it. Therefore, the equation (2) can be disaggregated sector-wise. In other words, we can write:

PY = ∑ni=1 Pi Yi,

where i stands for the ith sector of the economy like power, steel, oil, and gas etc. Pi is the price level of the particular sector, and Yi is the output of the sector. PiYi is the nominal GDP of the sector. So, for hotels and restaurants, PiYi would be its nominal GDP shown in the NIAs. Summation of all such sectoral nominal GDPs, written as ∑ni=1 PiYi, would be the total nominal GDP of the country.

As a corollary to the above, we can write that MV = ∑ni=1 MiVi, or the product of the total money supply and velocity in the economy, is the summation of sector-wise money supply and velocity.

Therefore, MiVi = PiYi … (3)

While theoretically, the quantity equation can be disaggregated (Werner 2005), the real issue is if one can find statistical data to proxy the theoretical breakdown. While the same is challenging, however, the theoretical breakdown helps in providing crucial insights on the money moving and changing hands among the players, forming part of a sector and the sectors’ contribution to the nominal GDP. In the present study, we shall focus on the electricity sector.

Power sector’s contribution to GDP: The Ministry of Statistics and Programme Implementation (MoSPI) comes out with the quarterly and yearly GDP figures for India. The GDP is calculated based on the estimates of gross value added (GVA) by economic acti­vity, for example, agriculture, mining and quar­rying, electricity, gas, water supply, construction, and trade and repair services. The MoSPI in its report, Changes in Methodology and Data Sources in the New Series of National Accounts: Base Year 2011–12 (MoSPI 2015), has mentio­ned that the calculation of GVA of electricity sector is done using the Ministry of Corporate Affairs (MCA) 21 database maintained by the MCA. The MCA 21 is a database of annual financial reports of the companies that includes both private and public sector power companies. The balance sheet and profit and loss acco­unts, forming part of the annual financial reports, are prepared on accrual ­basis ins­tead of on cash basis. Generators recognise revenues as billed instead of on cash received basis. As there is delay in the payment of bills by DISCOMs, but the revenue is recognised in the financial statements that populate MCA 21 database, GVA of the power/electricity sector is shown higher than what it would have been if financial reports were prepared on cash basis.

This, therefore, means that the equation of exchange referred to in equations (1), (2), or (3) is not in equilibrium (or not equal). As there is delay in payment of invoices by DISCOMs, the money supply in power/electricity sector is lower than the sectors’ nominal GDP for a financial year. In other words, the left-hand side of the equation is less than the right-hand side:

MeVe < (PeYe)


MeVe < (PeTe) … (4)

where e refers to “electricity” and M, V, P, Y, T suffixed with e be constr­ued, accordingly, for electricity sector only.

In the power sector, the money is created ultimately by the DISCOMs through the billing of and collection from the ­retail consumers. This money moves up the value chain through payment by the DISCOMs to generators, transmission com­­panies, and various other suppliers who, in turn, pass on this money to their ­vendors/ subcontractors/others. Thus, the money changes hands among various constituents, forming part of the electricity value chain. If the money is not paid by the DISCOMs, the generators and tra­nsmission companies would fail to pay to their vendors/subcontractors until and unless they use their own equity or borrow to supplement their cash position.

Balancing the equation of exchange: In the left-hand side of the equation of exchange, which is a product of money and velocity, either money should incre­ase or velocity or both to make it equal to the right-hand side. Velocity, the number of times money (Me) is used for transactions in a time period, can reasonably be considered constant as the economic agents forming part of the electricity value chain are fixed, thereby fixing the number of hands that money changes over a period of time. Hence, an increase in money supply alone would help to increase the left-hand side of the equation to make it equal to the right-hand side. The right-hand side, the nominal GDP, is already overestimated due to accrual basis of accounting procedure. It is also fixed as the price (Pe) and the output (Ye) cannot be changed in a post-facto scenario wherein goods or services are already delivered but remain unpaid. Therefore, the equation of exchange for the power sector would be:

MeVe = (PeYe) … (5)

As mentioned earlier, the right-hand side of the equation is equated to nominal GDP due to the lack of data on transactions. However, when we revert to the original equation of exchange wherein the right-hand side is the product of price (Pe) and transactions (Te), some inte­resting observations can be made. Price (Pe) is fixed as goods and services have been delivered at a predetermined contractual price (emphasis added as generators supply power through power sale/purchase con­tracts at specified tariffs). Now a transaction is said to occur if there is a transfer of good or service in ­return for payment thereof. In the power sector, while goods or services are transferred to DISCOMs, the payment against these are not made timely, thereby making the transactions incomplete. Hence, with the increase in money supply (Me), the transaction (Te) would be complete. The transaction (Te) is the variable part of the right-hand side of the equation. The equation of exchange for power sector in equilibrium would, therefore, be:

MeVe = (PeTe) … (6)

From equation (6), it can be concluded that in a post-facto scenario wherein the goods and services have been delivered at a predetermined contractual price without any payment made against them, an increase in money supply (M) would be non-inflationary and help in completing the transaction (T).

Means to Increase the Money Supply

We have already discussed the limitations of conventional methods to incr­ease the money supply to DISCOMs. We will now discuss two tools to increase money supply to the DISCOMs.

Central government reforms: The Mini­stry of Power in its latest distribution sector reforms, RDSS—reforms-based and results-linked (MoP 2021), puts special emphasis on smart prepaid metering for DISCOMs. Sizeable quantum of funds are earmar­ked for purchase and installation of smart prepaid meters for meeting two principal objectives, namely,

(i) Improving the collection efficiency and realisation per consumer by requiring them to make upfront payment before consuming electricity. Smart prepaid mete­ring projects, undertaken by Energy Effi­ciency Services Limited (ETEnergyWorld 2021), have shown an average increase in revenue per meter to the tune of `250/month/meter for the same retail tariff. In Bihar, the prepaid (PTI 2020) meters are seeing a credit balance of `20 per day, implying higher than 100% collection efficiency. Both better and higher collection per consumer thr­ough smart prepaid meters will increase money supply to DISCOMs.

(ii) Improving the billing efficiency by requiring prepaid smart meters installation for all consumers of DISCOMs. The average all-India billing efficiency is 85.36% (PFC 2021), which implies that around 15% of the energy remains unbilled. Met­ered connections for all consumers would result in higher cash flow to ­DISCOMs by covering the gap of 15% unbi­lled energy. This, however, is the chall­enging part as it requires political will to install meters and bill all the consumers.

While billing and collection efficiency would improve with the installation of smart prepaid meters and hence the DISCOMs’ cash flow, the extent of the same may not be sufficient to meet the past sizeable liabilities of unpaid dues over and above the current liabilities and cost increase. It is here that the monetary tool should also be explored as a principal or supplementary means to increase the cash flow of DISCOMs.

Monetary tool: The DISCOMs can also be provided higher money supply to meet payment liabilities by simply creating new money. It is generally believed that an increase in money supply by creating new money would cause inflation (or increase in price [Pe]). The unpaid dues problem of the power sector is an exception to this as explained in the equation of exchange previously and also because of the foll­owing reasons:

(i) No new discovery of price is happening as the supply of goods is at a predetermined contractual price and that the transactions (though incomplete) have already taken place.

(ii) Prices are sticky as they are tied up in term contacts. Most of the power sales contracts are for long-term duration (12 to 25 years).

Monetary tools like zero-coupon perpetual bonds, specifically meant to pay the outstanding liabilities of DISCOMs (without burdening them on repayment obligation), can be issued to garner the `2.59 lakh crore outstanding or some part of it. Such new currency creation being non-inflationary in nature would immediately address the payments problem, giving relief to generators many of whom are facing serious prospects of bankruptcy.

Hybrid approach: A hybrid approach that combines (i) the central government’s reform in terms of smart prepaid metering push along with measures to reduce AT&C losses, and (ii) the creation of new currency to fin­ance the DISCOMs could be used to maintain the long-term sustainability of this sector. The prepaid smart metering push, though done with the best intention, may not succeed if states fail to improve the billing efficiency. Further, the question of improving technical (line losses) and commercial losses (theft, wrong billing, etc), which form the main part of high AT&C loss, would require strong political will from the states that, had it been so, would have already seen DISCOM fin­ances improve like those in Gujarat. Hence, the gap in achieving financial turnaround in the reform initiated by the central government should be supplemented with the monetary tool thro­ugh the creation of more money to avoid bankruptcies and non-performing assets. The creation of more new electronic money to meet the outstanding DISCOM liabilities is crucial for the health and sustainability of the power sector. New currency creation is zero-cost, quick, and efficient. It should be seriously considered as an important tool for reform in the power sector.


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— (2021): “Executive Summary on Power Sector,” Central Electricity Authority,

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PTI (2020): “Discoms Generate 95pc Billing Efficiency Due to Smart Meters,” Economic Times, 12 May,

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Iyer, A (2020): “Future Redemption Portends a Debt Trap for States,” Mint, 4 November,

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— (2020b): “Report on Performance of Utilities 2017–18,” Power Finance Corporation, pp 3–4,

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Updated On : 1st Aug, 2022
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