Rejuvenating the power sector in Tamil Nadu

V SriramThe year 2024–25 was a watershed for India's state-owned power distribution sector, which turned profitable on an aggregate basis after more than a decade. What should ordinarily have been a routine business outcome becoming headline news underscores the condition of India's state-owned electricity distribution system. While the sector has turned the corner nationally, Tamil Nadu's energy utilities still have considerable ground to cover before becoming financially sustainable.Tamil Nadu is one of India's most industrialised and urbanised states, with the energy sector serving as a key economic driver. Manufacturing and technology-driven service sectors are energy-intensive, making it imperative for the state's power sector to be operationally efficient, financially self-sufficient, and environmentally sustainable.For a long time, TN was the only large state that had not unbundled its generation and distribution functions. Given that these are fundamentally different businesses with distinct operating and financial models, the move was long overdue. On April 1, 2024, TANGEDCO was unbundled into three entities: TNPDCL, handling the power distribution business; TNPGCL, handling thermal power generation; and TNGECL, handling renewable energy operations.The unbundling is the first step towards making the energy sector more efficient. The creation of a dedicated renewable energy company is a positive move and has already resulted in several significant initiatives, with the entity turning profitable in its first year of operations. The Tamil Nadu Renewable Energy Land Portal is another important initiative aimed at bringing stakeholders onto a single platform and bridging gaps in the solar power ecosystem.However, the legacy issues plaguing the thermal generation and distribution sectors continue. The opening balance sheets of these companies reflected a significant negative net worth arising from years of inefficient operations and under-recovery of costs. The gap between the Average Cost of Supply (ACS) and the Average Revenue Realisation (ARR) is reported at `0.12 per kWh. However, if the loss compensation grant of `16,076 crore (representing 75% of the operational loss) received from the state government is excluded, the gap widens sharply to `1.52 per kWh. The total comprehensive income for 2024–25 reflected a loss of over `4,000 crore even after accounting for the loss compensation grant.The combined negative net worth of the unbundled entity, TANGEDCO, stood at `1.46 lakh crore as of April 1, 2024, while total debt exceeded `1.80 lakh crore. The regulator had disallowed nearly `55,000 crore of debt in earlier tariff orders on the grounds that it did not pertain to asset acquisition. Much of this debt was contracted to fund losses arising from delays in tariff revisions. It is therefore imperative to restructure the debt and write off a portion of the accumulated losses.Some of the key steps required to rejuvenate the energy sector include:Improving operational performance:Reduce the ACS-ARR gap from the current level of `1.52 per kWh (Computed without taking into account the loss funding from the GoTN)Ensuring financial viability:Operations continue to incur losses despite substantial financial support from the government. (see table)Accelerating RDSS implementation:The Revamped Distribution Sector Scheme (RDSS) must be implemented at a faster pace to fully realise the benefits of distribution reforms.Restructuring loans:The current level of debt in the energy sector is clearly unsustainable. The required debt reduction is estimated at `55,000– `60,000 crore. This debt could be transferred to a special purpose vehicle (SPV), which can issue long-dated government-guaranteed bonds to existing lenders. The government can service the interest obligations, while the energy utilities can gradually repay the principal over time. Such a move would also help reduce TNPDCL's interest burden, which currently stands at around `10,000 crore annually.The unbundling of generation and distribution is only the first step in reforming the sector. This must be followed by financial restructuring and improvements in operational efficiency to ensure that the sector is capable of supporting the state's economic growth and meeting its long-term development targets.The author is Co-founder and Partner at Sammati Consulting and Analytics