Reforming India’s Power Distribution Sector

• 14 Feb 2026

For Prelims: Power Distribution Companies, Ujwal DISCOM Assurance Yojana, Revamped Distribution Sector Scheme 

For Mains: Power sector reforms and fiscal prudence, Role of regulatory institutions in utilities reform, Governance challenges in service delivery

Source: TH 

Why in News? 

Recent Union government data for Financial Year 2024–25 show a financial turnaround in Distribution Companies (DISCOMs), with improved Profit After Tax and reduced Aggregate Technical and Commercial (AT&C) losses following sectoral reforms.

Summary 

• Power distribution companies have shown a financial and operational turnaround with reduced AT&C losses, a narrowed ACS–ARR gap, and improved payment discipline due to recent reforms. 
• Despite these gains, continued dependence on State subsidies, non-cost-reflective tariffs, and unmetered agricultural supply remain major structural challenges. 
• Sustained reform through tariff rationalisation, regulatory strengthening, renewable integration, and improved governance is essential for long-term viability of DISCOMs. 

What are the Key Developments in DISCOM Performance? 

• Recent Financial Turnaround: Distribution Companies (DISCOMs) recorded a positive Profit After Tax (PAT) of ₹2,701 crore in Financial Year (FY) 2024-25, marking a significant improvement from losses of ₹67,962 crore in FY 2013-14, indicating a notable financial recovery. 
• Reduction in Aggregate Technical and Commercial (AT&C) Losses: AT&C Losses declined from 22.62% to around 15.04%, reflecting improved operational efficiency, although losses remain elevated in several States. 
• Dependence on State Government Support: A considerable portion of the financial improvement is attributable to tariff subsidies and direct takeover of losses by State governments, raising concerns regarding long-term sustainability. 
• Improved Payment Discipline: Implementation of the Late Payment Surcharge (LPS) Rules has significantly reduced legacy dues and improved payment cycles, strengthening liquidity across the electricity value chain. 
• Demand and Cost Pressures: Rising electricity demand and fluctuations in fuel costs continue to exert pressure on power procurement expenses. 
• Reform Implementation through Revamped Distribution Sector Scheme (RDSS): Performance-linked financial assistance under RDSS has contributed to operational improvements and enhanced accountability. 

Government Initiatives to Support State DISCOMs 

• Ujwal DISCOM Assurance Yojana (UDAY): Launched in 2015 to address mounting DISCOM debt,  UDAY  enabled states to take over 75% of DISCOM liabilities through low-interest bonds. It aimed to reduce AT&C losses, improve billing efficiency, promote smart metering, and enhance operational accountability. 
• Revamped Distribution Sector Scheme (RDSS): Introduced with an outlay of ₹3,03,758 crore for FY 2021-22 to FY 2025-26, RDSS seeks to reduce AT&C losses to 12–15% and eliminate the ACS-ARR gap. Funding under RDSS is linked to performance-based reforms and measurable operational improvements, promoting financial sustainability and reliability in the distribution sector. 
• Integrated Power Development Scheme (IPDS): Focused on strengthening urban power distribution infrastructure,IPDS aims to improve supply reliability, reduce technical losses, and enhance customer service in urban areas. 
• Late Payment Surcharge (LPS) Rules: Implemented to enforce financial discipline, these rules allowed DISCOMs to clear legacy dues in up to 48 equated monthly instalments (EMIs). Outstanding dues reduced significantly from ₹1,39,947 crore in June 2022 to ₹4,927 crore by January 2026, improving liquidity and payment cycles across the power value chain. 
• Integrated Rating of DISCOMs: Annual ratings assess financial and operational performance, promoting transparency and accountability. Recent editions highlighted reductions in AT&C losses and improvements in payment discipline. 

What are the Challenges Faced by DISCOMs? 

• Dependence on State Subsidies: Many DISCOMs have shown financial improvement largely due to tariff subsidies and direct loss absorption by State governments. Without such fiscal support, several utilities would continue to report substantial losses, raising concerns about long-term sustainability. 
• Chronic Financial Stress and Legacy Debt: Historically high AT&C losses and a widening ACS-ARR gap have resulted in accumulated losses and mounting debt. Although recent improvements are visible, the risk of reverting to revenue deficits remains. 
• Tariff Rationalisation and Political Economy Constraints: Non-cost-reflective tariffs and delayed State subsidy payments have historically weakened DISCOM finances. Political reluctance to revise tariffs or withdraw free power schemes continues to pose a structural challenge. 
• Employee Resistance to Privatisation: Employees of public-sector DISCOMs often oppose privatisation due to fears of job losses, retrenchment, and deterioration in service conditions. Past experiences, such as Delhi’s voluntary retirement scheme, reflect concerns about job security and financial stability. 
• Unmetered Agricultural Supply and Data Gaps: In several States, unmetered power supply to the farm sector distorts actual consumption data and complicates subsidy estimation, limiting effective financial planning. 

What Steps Are Needed to Further Strengthen DISCOMs? 

• Strengthening Financial Discipline: Strict enforcement of the Late Payment Surcharge Rules and timely clearance of dues must continue to prevent the recurrence of legacy debt and ensure smooth cash flow across the power value chain. 
• Cost-Reflective Tariffs: Institutionalising automatic and timely tariff revisions aligned with fuel costs and inflation is essential to prevent widening of the ACS-ARR gap and ensure long-term financial sustainability. 
• Targeted Subsidy Delivery: Moving towards Direct Benefit Transfer (DBT) for electricity subsidies can enhance transparency, reduce fiscal stress on DISCOMs, and ensure support reaches genuinely vulnerable consumers. 
• Expanding Feeder Segregation: States with significant agricultural consumption should adopt feeder segregation to accurately measure farm usage and reduce inefficiencies arising from unmetered supply. 
• Promoting Solarisation in Agriculture: Scaling up solar pump deployment and decentralised renewable generation can lower procurement costs and reduce subsidy burdens in the long run. 
• Regulatory Strengthening: State electricity regulatory commissions must be empowered to enforce transparent tariff determination, incentivise efficiency, and protect consumer interests. 

Conclusion 

Recent improvements in DISCOM performance reflect the impact of targeted reforms and fiscal discipline. However, sustained progress depends on reducing subsidy dependence, strengthening regulation, and improving governance to ensure long-term financial viability of the power distribution sector. 

Drishti Mains Question

Improving the financial health of DISCOMs is essential for fiscal prudence and energy security. Examine the recent reforms, persistent challenges, and the way forward.

Frequently Asked Questions (FAQs) 

1. What are DISCOMs? 
They are power distribution companies responsible for supplying electricity to consumers. 

2. Why have DISCOM finances improved recently? 
Reforms, subsidy support, and Late Payment Surcharge rules improved payment discipline and reduced losses. 

3. Why do DISCOMs still face problems? 
Dependence on state subsidies, free power schemes, and unmetered agricultural supply continue to affect long-term financial sustainability. 

4. What is UDAY? 
Launched in 2015, Ujwal DISCOM Assurance Yojana allowed states to take over 75% of DISCOM debt through low-interest bonds and aimed to reduce losses and improve billing efficiency. 

5. What is IPDS? 
The Integrated Power Development Scheme strengthens urban power distribution infrastructure to improve reliability and reduce technical losses. 

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Prelims:

Q. Which one of the following is the purpose of ‘UDAY’, a scheme of the Government? (2016)

(a) Providing technical and financial assistance to start-up entrepreneurs in the field of renewable sources of energy  

(b) Providing electricity to every household in the country by 2018  

(c) Replacing the coal-based power plants with natural gas, nuclear, solar, wind and tidal power plants over a period of time  

(d) Providing for financial turnaround and revival of power distribution 

Ans: (d)