For decades, India’s power distribution companies were locked in financial distress, weighed down by high aggregate technical and commercial losses and chronic cash shortages. Bailouts came and went, but losses persisted.
What changed was not another rescue package, but a correction to pricing discipline. In December 2022, the government amended Rule 14 of the Electricity Rules, 2005, mandating automatic and periodic pass-through of fuel and power purchase costs. The effect was to confront—rather than accommodate—the political reluctance to adjust tariffs.
READ | Can discom reforms finally fix India’s power sector?
This mattered because power procurement accounts for roughly three-fourths of the average cost of supply, with fuel alone contributing 70–80 per cent. When fuel prices rose, generators billed higher costs, but discom tariffs often remained frozen. The gap between the average cost of supply (ACS) and average revenue realised (ARR) widened. Losses mounted. State governments delayed subsidies or absorbed debt through periodic takeovers. The cycle repeated.
Fixing the revenue leakages
This is only half of the story. A utility can charge the right price on paper but still collapse financially if it does not bill accurately or collect efficiently. This is where another power sector reform stepped in. The government decided to parallel push smart metering which has begun to reshape the revenue side.
Smart meters reduce human discretion in billing, curb theft, enable remote disconnections and give utilities data on consumption patterns. In the last three years, the acceleration in smart meter installation has risen sharply. As installations scaled up, billing efficiency improved across many utilities. Several discoms now enjoy enviable levels of collection efficiency, including in states historically associated with high commercial losses.
These improvements can be attributed to the Revamped Distribution Sector Scheme which is a reform-linked programme aimed at making distribution financially sustainable and efficient. The key point where the scheme is different from its predecessors is that they were focused mainly on debt relief, but the latest intervention ties financial support to demonstrable performance on parameters such as loss reduction, metering and timely subsidy payments.
There is a growing understanding that money alone cannot fix discoms unless incentives change at the operational level. Infrastructure upgrades, feeder segregation, system strengthening and IT enablement under the scheme have contributed to a steady decline in aggregate technical and commercial losses, bringing many utilities below thresholds once thought unattainable.
One institutional risk remains understated. Automatic fuel-cost pass-through depends not only on central rules, but on the conduct of State Electricity Regulatory Commissions. In several states, commissions had delayed tariff orders, imposed caps, or allowed deferrals during politically sensitive periods.
The December 2022 amendment has narrowed this discretion, but did not eliminate it. If regulators relapse into postponement, the ACS-ARR gap will reopen, even with smart meters and better collections. The durability of the discom turnaround will therefore rest as much on regulatory enforcement as on financial design.
READ | India eyes 24×7 electricity, but rural reality, fuel choices cast shadows
Discom reform agenda incomplete
Another important reform has been linking states’ borrowing limits to progress in power sector reforms. The government allowed states to borrow more, but only if they improved the financial health of their electricity distribution companies. This pushed state governments to clear their own unpaid electricity bills and release pending subsidy payments.
For years, government departments and local bodies were among the biggest defaulters, even as governments spoke about financial discipline. Making the payment of these dues a condition for reform benefits helped break this cycle. As these old payments started coming in and cash flow improved, discoms were in a better position to pay power generators on time. However, the reform journey is far from complete.
The distribution sector now sits at the centre of India’s energy transition. As renewable energy penetration rises, discoms must manage variability, invest in grid flexibility and redesign tariffs to reflect time-of-day usage. Financially healthier utilities are better placed to sign long-term renewable contracts and invest in storage and grid modernisation.
Reform must therefore move from finances to building capabilities. For now, it looks like the sector is doing its basics right. If the momentum holds, this may finally be the chapter where the sector’s weak links begin to fade away.
For decades, India’s power distribution companies were locked in financial distress, weighed down by high aggregate technical and commercial losses and chronic cash shortages. Bailouts came and went, but losses persisted.
What changed was not another rescue package, but a correction to pricing discipline. In December 2022, the government amended Rule 14 of the Electricity Rules, 2005, mandating automatic and periodic pass-through of fuel and power purchase costs. The effect was to confront—rather than accommodate—the political reluctance to adjust tariffs.
This mattered because power procurement accounts for roughly three-fourths of the average cost of supply, with fuel alone contributing 70–80 per cent. When fuel prices rose, generators billed higher costs, but discom tariffs often remained frozen. The gap between the average cost of supply (ACS) and average revenue realised (ARR) widened. Losses mounted. State governments delayed subsidies or absorbed debt through periodic takeovers. The cycle repeated.
Fixing the revenue leakages
This is only half of the story. A utility can charge the right price on paper but still collapse financially if it does not bill accurately or collect efficiently. This is where another power sector reform stepped in. The government decided to parallel push smart metering which has begun to reshape the revenue side.
Smart meters reduce human discretion in billing, curb theft, enable remote disconnections and give utilities data on consumption patterns. In the last three years, the acceleration in smart meter installation has risen sharply. As installations scaled up, billing efficiency improved across many utilities. Several discoms now enjoy enviable levels of collection efficiency, including in states historically associated with high commercial losses.
READ | PM Surya Ghar Yojana is changing how India consumes power
These improvements can be attributed to the Revamped Distribution Sector Scheme which is a reform-linked programme aimed at making distribution financially sustainable and efficient. The key point where the scheme is different from its predecessors is that they were focused mainly on debt relief, but the latest intervention ties financial support to demonstrable performance on parameters such as loss reduction, metering and timely subsidy payments.
There is a growing understanding that money alone cannot fix discoms unless incentives change at the operational level. Infrastructure upgrades, feeder segregation, system strengthening and IT enablement under the scheme have contributed to a steady decline in aggregate technical and commercial losses, bringing many utilities below thresholds once thought unattainable.
One institutional risk remains understated. Automatic fuel-cost pass-through depends not only on central rules, but on the conduct of State Electricity Regulatory Commissions. In several states, commissions had delayed tariff orders, imposed caps, or allowed deferrals during politically sensitive periods.
The December 2022 amendment has narrowed this discretion, but did not eliminate it. If regulators relapse into postponement, the ACS-ARR gap will reopen, even with smart meters and better collections. The durability of the discom turnaround will therefore rest as much on regulatory enforcement as on financial design.
Discom reform agenda incomplete
Another important reform has been linking states’ borrowing limits to progress in power sector reforms. The government allowed states to borrow more, but only if they improved the financial health of their electricity distribution companies. This pushed state governments to clear their own unpaid electricity bills and release pending subsidy payments.
For years, government departments and local bodies were among the biggest defaulters, even as governments spoke about financial discipline. Making the payment of these dues a condition for reform benefits helped break this cycle. As these old payments started coming in and cash flow improved, discoms were in a better position to pay power generators on time. However, the reform journey is far from complete.
The distribution sector now sits at the centre of India’s energy transition. As renewable energy penetration rises, discoms must manage variability, invest in grid flexibility and redesign tariffs to reflect time-of-day usage. Financially healthier utilities are better placed to sign long-term renewable contracts and invest in storage and grid modernisation.
Reform must therefore move from finances to building capabilities. For now, it looks like the sector is doing its basics right. If the momentum holds, this may finally be the chapter where the sector’s weak links begin to fade away.