Centre Provides Financial Incentives to States to Accelerate Power Sector Reforms

The Department of Expenditure, Ministry of Finance, has given a boost to reforms by the States in power sector by providing financial incentives in the form of additional borrowing permissions. This move aims to encourage and support the States in undertaking reforms to enhance the efficiency and performance of the power sector.

The initiative was announced by the Union Finance Minister in Union Budget 2021-22. Under this initiative, an additional borrowing space of up to 0.5 percent of the Gross State Domestic Product (GSDP) is available to the States annually for a four-year period from 2021-22 to 2024-25. This additional financial window is dependent on implementation of specific reforms in the power sector by the States.

The initiative has spurred State Governments to initiate the reform process, and several States have come forward and submitted details of the reforms undertaken and achievements of various parameters to the Ministry of Power.

Based on the recommendations of the Ministry of Power, the Ministry of Finance has granted permission for reforms undertaken in 2021-22 and 2022-23 to 12 State Governments. Over the last two financial years, they have been allowed to raise financial resources of Rs. 66,413 crore through additional borrowing permissions.

The breakdown of the amount allowed for each State as an incentive to embark on the reform process is as follows:

In the financial year 2023-24, States can continue to avail themselves of the facility of additional borrowing linked to power sector reforms. An amount of Rs. 1,43,332 crore will be available as an incentive to States for undertaking these reforms in 2023-24. States that were unable to complete the reform process in 2021-22 and 2022-23 may also benefit from the additional borrowing earmarked for 2023-24 if they carry out the reforms in the current financial year.

The primary objectives of granting financial incentives for undertaking power sector reforms are to improve operational and economic efficiency within the sector and promote a sustained increase in paid electricity consumption.

To be eligible for the incentives, State governments must undertake a set of mandatory reforms and meet stipulated performance benchmarks. The required reforms include:

• Progressive assumption of responsibility for losses of public sector power distribution companies (DISCOMs) by the State Government.
• Transparency in the reporting of financial affairs of power sector including payment of subsidies and recording of liabilities of Governments to DISCOMs and of DISCOMs to others.
• Timely rendition of financial and energy accounts and timely audit.
• Compliance with legal and regulatory requirements.

Upon completion of these reforms, a State's performance is evaluated based on specific criteria to determine its eligibility for the incentive amount which may range from 0.25% to 0.5% of GDP based on performance. The evaluation criteria include:

• Percentage of metered electricity consumption against total energy consumption, including agricultural connections.
• Subsidy payment by Direct Benefit Transfer (DBT) to consumers.
• Achievement of targets for reduction in Aggregate Technical & Commercial (AT&C) loss.
• Meeting the target of reduction in Average Cost of Supply and Average Realizable Revenue (ACS-ARR) Gap.
• Reduction in cross subsidies.
• Payment of Electricity bills by Government Departments and local bodies.
• Installation of prepaid meters in government office.
• Use of innovations and innovative technologies.

Furthermore, States are eligible for bonus marks for privatisation of power distribution companies

The Ministry of Power serves as the nodal Ministry for assessing the performance of States and determining their eligibility for granting additional borrowing permission.