Distribution company

Indian Economy glossary

Also called: Discom, DISCOM · Topic: Infrastructure: Transport, Communications and Energy · NCERT: Beyond NCERT

Meaning

A distribution company (discom) is the power utility that buys electricity in bulk from generators, carries it over the local low-voltage network of poles, wires and transformers, and then supplies, meters and bills it to final consumers such as homes, farms, shops and factories. In India most discoms are owned by state governments. Discoms are the only part of the power chain that collects money from consumers, so their finances decide whether generators get paid, whether new power plants find a buyer and whether reform of the power sector succeeds.

Key formula for measuring a discom's losses: AT&C loss (%) = [1 − (Billing efficiency × Collection efficiency)] × 100

Explanation

Where the discom sits in the power chain

The power sector has three links:
Generation: power plants produce electricity.
Transmission: high-voltage lines carry it over long distances.
Distribution: the discom takes it from the substation to each consumer's meter.
The Electricity Act 2003 split up the old state electricity boards. Each board used to do all three jobs. The Act separated them into generation, transmission and distribution companies. This is how discoms were created.
What a discom does:
Buys power under a PPA (power purchase agreement, a long-term contract with a generator that fixes the tariff and supply terms).
Runs the local network. It maintains the wires and transformers in towns and villages.
Meters, bills and collects. It reads meters, sends bills and collects payment.
Meets legal duties. One example is buying a minimum share of renewable power (see below).
Its money flow:
Money comes in from consumer tariffs and from state government subsidy for groups who get cheap power.
Money goes out to pay generators, transmission charges, staff and network upkeep.
When the money coming in is less than the cost, the discom borrows. Debt builds up and payments to generators are delayed.

Why discoms lose money

AT&C losses (aggregate technical and commercial losses): power that enters the discom's network but is never paid for.
Technical loss: power lost as heat in wires and transformers.
Commercial loss: theft, faulty meters, power that is never billed, and bills that are never paid.
Worked example:
- The discom receives 100 units. It bills 85 units, so billing efficiency is 85%.
- Consumers pay 95% of the billed amount, so collection efficiency is 95%.
- Units actually paid for = 100 × 0.85 × 0.95 = 80.75 units.
- AT&C = [1 − (0.85 × 0.95)] × 100 = 19.25%.
- So the discom pays generators for 100 units but gets money for only about 81.
These losses are the root of discom debt.
Cross-subsidy (some consumers pay above cost so that others can pay below cost):
Industry and commerce pay more. Farmers and poor households pay less.
The Tariff Policy wants tariffs to stay within ±20% of the average cost of supply.
The side effect: high-paying industrial users try to leave the discom.
- They buy power directly through open access.
- The discom loses its best-paying customers.
- The burden on the remaining consumers grows.
Tariffs below cost and delayed subsidy payments:
Retail tariffs are often kept low for political reasons.
If the state government pays its promised subsidy late, the gap turns into discom debt.
Locked-in PPAs:
Long PPAs can force a discom to keep paying for capacity it no longer needs.
States sometimes try to renegotiate these contracts, which hurts investor confidence.

Discoms and renewable energy

Renewable purchase obligation (RPO): discoms must buy a minimum share of their power from renewable sources.
It is now called the renewable consumption obligation under the Energy Conservation (Amendment) Act 2022.
A discom can meet it by buying green power directly or by buying RECs (renewable energy certificates). 1 REC = 1 MWh of renewable power, and RECs trade on power exchanges (CERC, 2010).
A weak discom is a weak buyer. A renewable project needs a PSA (power sale agreement, the contract in which a state discom agrees to buy the power).
About 44 GW of solar capacity won in auctions run by central agencies still has no signed PSA.
PRS links this partly to discoms buying too little under the RPO.
Without a buyer, the developer cannot raise loans to build.
Cheaper solar lowers discoms' power purchase costs. Solar tariffs fell from about ₹8/unit (2014-15) to as low as ₹2.15/unit.
Rooftop solar cuts discom revenue:
Under net metering, rooftop owners get credit for surplus power they send to the grid.
More than 21 lakh PM Surya Ghar homes now have a zero bill.
The discom still has to keep the wires running and supply these homes at night, but it earns very little from them.
Time-of-day (ToD) tariff:
The discom charges more at peak hours and less during solar hours.
This shifts demand to the hours when cheap solar power is available.

In India

Constitution: electricity is in the Concurrent List (entry 38), so both the Centre and the states make laws on it. Distribution is run mainly by state-owned discoms.
Law and regulators:
The Electricity Act 2003 unbundled the state electricity boards.
The Act created CERC (Central Electricity Regulatory Commission) and the state regulators, the SERCs.
It brought in open access and power trading.
Losses: AT&C losses fell from about 22% (FY21) to about 16% (FY24) (verify).
Reform schemes:
UDAY (2015): state governments took over discom debt.
Revamped Distribution Sector Scheme (RDSS, 2021): prepaid smart meters, with an AT&C target of 12–15%.
Late Payment Surcharge Rules 2022: make discoms clear the dues they owe to generators on time.
Market rules that affect discoms:
Open access: large consumers pay wheeling charges (a fee for using the network) plus a cross-subsidy surcharge. The Green Energy Open Access Rules 2022 cut the threshold for buying green power to 100 kW.
ToD tariff: applies from April 2024 to commercial and industrial consumers of 10 kW or more, and from April 2025 to most other consumers except agriculture (verify).
Farm solar (PM-KUSUM):
Under Component-A, the discom buys power from farmers' plants under a 25-year PPA.
The Ministry told the Standing Committee on Energy that discoms were not meeting their legal duty to buy renewable power. Some held back because they expected tariffs to fall later.
Component-A stood at about 6% progress.
The Committee recommended that discoms meet their renewable obligations or pay penalties.
In December 2020, MNRE issued guidelines for feeder-level solarisation under Component-C. Solarisation tries to ease the fiscal stress that farm power subsidies put on discoms.
Rooftop solar: PM Surya Ghar Muft Bijli Yojana (2024) targets 1 crore homes, with up to 300 free units a month (verify).

Don't confuse with

Generation company / transmission company: a generation company produces power and a transmission company carries it over long distances on high-voltage lines. Only the discom deals directly with retail consumers and collects their bills.
State electricity board (SEB): the old single body that handled generation, transmission and distribution together. The Electricity Act 2003 split it into separate companies, and the discom is one of the successors.
PPA vs PSA: a PPA is the discom's contract to buy power from a generator. A PSA is the contract in which a state discom agrees to buy power won in auctions run by central agencies. Both make the discom the buyer.
AT&C loss vs technical loss: technical loss is only power lost physically in wires and transformers. AT&C also includes theft, unbilled power and unpaid bills, which is why it uses both billing and collection efficiency.

Prelims Hooks

AT&C (%) = [1 − (Billing efficiency × Collection efficiency)] × 100. With 85% billing and 95% collection, AT&C = 19.25%.
The Electricity Act 2003 unbundled SEBs into separate generation, transmission and distribution companies, and created CERC and the SERCs. Electricity is Concurrent List entry 38.
UDAY (2015): states took over discom debt. RDSS (2021): prepaid smart meters and an AT&C target of 12–15%.
Tariff Policy: tariffs should stay within ±20% of the average cost of supply. Open-access buyers pay wheeling charges plus a cross-subsidy surcharge. The green open-access threshold is 100 kW (2022).
Trap: "RPO and REC are the same thing." FALSE. RPO is the obligation to buy renewable power, now the renewable consumption obligation under the Energy Conservation (Amendment) Act 2022. A REC is the tradable certificate used to meet it (1 REC = 1 MWh).
Trap: "Discoms only distribute power and have no role in renewable expansion." FALSE. About 44 GW of auctioned solar capacity has no signed PSA with state discoms.

Mains Points

Discoms are the weakest link in the power chain.
AT&C losses, below-cost tariffs and late subsidy payments lead to debt and delayed payments to generators.
Delayed payments discourage new investment.
UDAY moved the debt onto state budgets but did not fix the losses behind it. RDSS (smart meters) and the LPS Rules 2022 try to fix that root cause.
A lasting fix needs SERCs to set tariffs that cover costs and states to pay their subsidies on time.
The cross-subsidy trade-off:
Cheap power for farmers and poor households is a fair social goal.
But tariffs well above cost push industry towards open access, so the discom loses its best-paying customers.
Keeping tariffs within the ±20% band and paying subsidies directly from the state budget balance fairness with discom health.
Discom finances decide whether India's energy transition succeeds:
Weak discoms delay PSAs (about 44 GW unsigned) and hold back PM-KUSUM purchases.
They also lose revenue from zero-bill rooftop homes.
Possible fixes:
- enforce the renewable consumption obligation with penalties;
- plan for lost rooftop revenue within RDSS;
- use ToD tariffs so discoms can absorb daytime solar.

Infrastructure: Transport, Communications and Energy