India’s power ministry is working on a plan to alleviate the poor financial health of the country’s ailing distribution companies (discoms) in a move that could be critical for the solar power sector, according to an industry analyst.

Energy minister Piyush Goyal said a proposal attempting to provide permanent solutions to the debt-ridden discoms will be presented to India’s Union Cabinet “very soon”.

The package would help deal with INR4 trillion (US$61 billion) of discoms’ bad loans, with the intention of bringing down discoms' liabilities.

Poor financial health of discoms is consistently cited by industry commentators as a major barrier for the solar industry in India. It means they are less willing to take on electricity produced by solar power projects.

Jasmeet Khurana, senior consulting manager at analyst firm Bridge to India, told PV Tech: “Improvement in the financial health of state level power distribution companies is critical if India’s solar mission has to succeed.”

Khurana said previous bailout packages have not delivered the desired results and there needs to be more accountability fixed on states for reforms and performance.

For example, the UPA government had previously finalised a financial restructuring plan (FRP) for the discoms, but this was unsuccessful.

However, referring to the latest plans, Khurana said: “Except from some concerns from the lenders, we have mostly heard the right kind of noises about the current bailout package. We are waiting to see the final contours of this proposal.

“The first priority should be to reduce leakages and inefficiencies in power distribution at the state level. Beyond that, states will also need to raise power tariffs for consumers.”

Discoms have been hit by subsidised tariffs and are incurring annual losses of INR600 billion, which has a knock on effect for public sector banks as the bad loans rise.

Goyal, who will enter meetings with bankers and states including Tamil Nadu and Uttar Pradesh to discuss the debt issues, said: “The discussion with all major states facing problems are almost complete. I will meet Madhya Pradesh Chief Minister tomorrow in this regard". 

Referring to the readiness of the banks to be hit by lower interest rates for the discoms, Goyal added: "I can assure you that every bank has hailed the innovative way in which a permanent resolution to the discom problems has been worked out. Banks are delighted at the entire proposal."

Khurana added: “Resolution of Discom issues is critical not just for the solar sector but for the power sector and, thereby, the economy of India.”