The Achilles’ heel of India’s power sector: Why discoms remain the weak link

India's target of reaching 500 gigawatts (GW) of energy from non-fossil energy sources may face numerous hurdles unless more investments and focus are allocated to the distribution sector, despite the rapid creation of generation and transmission capacity, say experts.

As of March 2025, distribution companies in India owed over $9 billion in unpaid dues. The accumulated losses of distribution companies in India totalled $75 billion as of 2023, and offtake risk arising from the inability of distribution companies to pay generation companies fully and on time is cited as a key risk by investors, notes the International Energy Agency (IEA)'s World Energy Investment 2025 report.

The weak link in the value chain

India's renewable energy generation capacity has seen significant growth, reaching 220.10 GW as of March 31, 2025. This includes 105.65 GW from solar energy, 50.04 GW from wind energy, 11.58 GW from bioenergy, and 5.10 GW from small hydro power. The Ministry of New and Renewable Energy (MNRE) reported a record annual capacity addition of 29.52 GW in FY 2024-25, with solar energy leading the additions. The generation capacity addition projected is at 44 GW in FY2026, led by renewables and thermal. About 28.7 GW of renewables and 4.5 GW of thermal were added in FY25. Next year, the addition will be 32 GW of renewables and 9.7 GW of thermal, as over 40 GW of thermal projects are under construction, estimates rating agency ICRA.

To meet net-zero target set by 2070, India will cumulatively need to invest $1.3 trillion in non-fossil power generation capacity to 2035, says IEA.

There are about 70 discoms in India, of which only 13 are in the private sector. Recently, Uttar Pradesh decided to privatise two state-run electricity distribution companies – Purvanchal Vidyut Vitaran Nigam Ltd. (PuVVNL) and Dakshinanchal Vidyut Vitaran Nigam Ltd. (DVVNL). Over the years, despite generation capacity addition and upgradation in transmission infrastructure, distribution remained the weakest link in India's electricity chain.

To address these risks, India has been incorporating a slew of reforms like Ujjwal DISCOM Assurance Yojana (UDAY), which seeks to improve the financial health of distribution companies by restructuring debt and promoting operational efficiencies; introducing late payment surcharge rules that penalise distribution companies for late payments to generation companies, and provide a framework for clearing legacy dues, and establishing the Payment Security Mechanism of the Solar Energy Corporation of India (SECI), which includes escrow accounts, a payment security fund and state government guarantees in case distribution companies fail to pay developers.

Burden of discoms

Rating agency ICRA says book losses for discoms at the all-India level were ₹57,200 crore in FY23, which got reduced to ₹25600 crore in FY24, though the gross debt position for state-owned discoms at the all-India level increased during the year.

''Discoms' book losses at the all-India level had witnessed a decline in FY2024 over FY2023, led by higher tariff and subsidy, along with the revenue grants from the state governments to fund the previous year’s losses. However, the gap between the cost of supply and tariff realisation persists across most states,'' says Vikram V, Vice President & Co-Group Head - Corporate Ratings, ICRA.

Moreover, the gross debt for state-owned discoms witnessed a sharp increase to ₹7.4 trillion as of March 2024 from ₹6.6 trillion in March 2024, driven by debt availed to clear the past dues to generators and to fund working capital and capex amid continued losses. Such high debt levels are unsustainable for discoms, given their current revenues and profitability, observes ICRA.

''The tariff orders for FY26 have been issued in 19 out of the 28 states as of May 2025, reflecting moderate progress in the issuance of tariff orders. Despite the loss-making operations of the discoms, the tariff hikes approved for FY2026 remain muted across most states, similar to FY25,'' says Vikram.

ICRA expects the cash gap per unit for the discoms at the all-India level to remain high at 35 paise per unit in FY2026. Its outlook for the power distribution segment remains 'Negative' amid limited tariff hikes and continued loss-making operations. ''The progress in the smart metering programme along with the timely implementation of fuel & power purchase cost adjustment framework would play an important role in improving the discom finances, going forward,” says Vikram.