ICRA maintains negative outlook on power distribution segment

17 Sep 2025 Evaluate

The rating agency ICRA has maintained its Negative outlook on power distribution segment, on account of weak operating efficiencies, inadequate tariff revisions, and high debt levels. It has highlighted that the regulatory assets (RA) position for seven state discoms remains elevated at around Rs 3 trillion. It added that Supreme Court (SC) has recently directed the liquidation of RA within four years, although implementation by state discoms remains to be seen. It has suggested that improved operating efficiency and implementation of regulatory reforms remain critical to address discom financial stress.

ICRA has said that the tariff orders for FY2026 have been issued in 23 out of 28 states as of August 2025, indicating a moderate progress as these should have been issued by March 2025 for all states. Moreover, the median tariff hike at the all-India level remains modest at 1.9% in FY2026, lower than the 2.1% in FY2025, reflecting continued reluctance to align tariffs with the cost of supply, wherein the power purchase cost (PPC) remains the major contributor. However, it has indicated that the GST rate rationalisation of coal from 5% to 18% and removal of compensation cess of Rs 400 per ton, is expected to reduce the cost of generation for coal-based power generators. This is expected to further benefit the discoms, as the move is likely to translate into a reduction of around 12 paise per unit in their cost of supply as coal-based capacity accounts for over 70% of total generation at an all-India level.

Meanwhile, it noted that the gross debt position for state owned discoms at the all-India level rose to Rs 7.4 trillion as of March 2024, up from Rs 6.6 trillion a year earlier, reflecting continued reliance on borrowings. Further, it raised caution over subsidy dependence of discoms and expects the dependency to rise to Rs 2.2 trillion in FY2026, up from Rs 2.1 trillion in FY2025, driven by higher average cost of supply and new subsidy schemes in certain states. It added that apart from the large subsidy dependence, discoms receive loss funding support from the state governments putting fiscal pressure on the state finances.

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