[Burning Issue] Ujwal DISCOM Assurance Yojana (UDAY)- A Critical Anslysis

Ujjwal DISCOM Assurance Yojana (UDAY)- A Critical Anslysis

Context

  • Launched in 2015, UDAY is aimed at reviving electricity distribution companies (discoms), improving demand and, in the process, resolving the woes in the sector.
  • It took off well, with a large number of states joining the scheme.
  • Several states took over the debt of their utilities, improving their liquidity situation, even as progress on other key parameters such as reduction in aggregate technical and commercial losses lagged.

Background

  • For many decades, State discoms have been supplying electricity at tariffs that are far below cost.
  • For obvious political reasons, States have been wary of revising power tariffs in line with rising costs.
  • Inefficiencies in power distribution such as large transmission and distribution losses on power, have further strained the finances of the discoms.
  • Discoms in the country had accumulated losses of approximately Rs 3.8 lakh crore. Between 2011-12 and 2014-15, the outstanding debt shot up from Rs 2.4 lakh crore to Rs 4.3 lakh crore. This debt is being serviced at interest rates as high as 15 per cent.
  • Discoms have stopped buying electricity from power-generation companies and cut down supply to consumers.
  • In turn, power-generation companies have suffered from the fall in demand — spot prices for electricity have crashed and are, at present, far below the long-term purchase agreement prices.
  • The banks that loaned money to them are accumulating non-performing assets because the latter are in no position to repay.

What is it?

  • Under the scheme, States will take over three-fourths of the debt of their respective discoms.
  • The governments will then issue ‘UDAY bonds’ to banks and other financial institutions to raise money to pay off the banks.
  • The remaining 25 per cent of the discom debt will be dealt within one of the two ways —
  • conversion into lower interest rate loans by the lending banks
  • or be funded by money raised through discom bonds backed by State guarantee.
  • In return for the bailout, the discoms have been given target dates (2017 to 2019) by which they will have to meet efficiency parameters such as reduction in power lost through transmission, theft and faulty metering, installing smart meters and implementing GIS (geographic information system) mapping of loss making areas.
  • States will also have to ensure that power tariffs are revised regularly.

How UDAY attempts to improve the situation?

  • UDAY attempts to buffer the finances of the distribution companies, or discoms, from the subsidies that state governments may want to provide for power.
  • This is done by asking states to issue bonds to banks as repayment for discom dues. The states will now have to directly bear on their budgets the entire cost of the subsidies.
  • It attempts to enforce discipline on States as it requires them to absorb a part of future losses of the discoms.

What else can be done to improve the financial health of discoms?

  • One way is to ask the consumer to pay full price, as determined by state regulators and later on the state governments can directly transfer subsidy payments to the consumer.
  • This way, discoms’ financial health is protected and the subsidy becomes an explicit contract between the government and the beneficiary.
  • Another way is to build the subsidy into the tariffs and have an annual budgetary provision for subsidies, which is transferred to discoms at periodic intervals.

What is left out of UDAY?

UDAY is silent on improving the operational efficiencies.

Following ways can be adopted to improve the operational efficiencies:

  • Smart metering.
  • Upgrading of transformers.
  • Separating agricultural connections at the transformer level.
  • Use of efficient LED bulbs, agricultural pumps, fans & air-conditioners

Significance of UDAY:

  • UDAY aims at reforming the power sector. The discoms poor finances are constraining their electricity purchases, which in turn is forcing generation companies to idle their plants. Reliable, reasonably priced and sustainable power supply is critical for economic growth.
  • The power sector’s debt woes have also exposed the banking sector to risks. With this debt now being taken over by the States, banks can be assured of timely repayment.
  • It is seen as a path-breaking reform for realizing the Prime Minister’s vision of affordable and accessible 24×7 Power for All.
  • It is also a shining example of the utilization of the best principles of cooperative and competitive federalism.
  • UDAY also accelerates the process of reform across the entire power sector and will ensure that power is accessible, affordable and available for all.
  • Rating agency Crisil believes that by fiscal 2018, UDAY can potentially reduce the power companies’ losses by 50%.

 

Critical Analysis-

  • Years after the Ujwal Discom Assurance Yojana (UDAY) scheme was launched by the Centre to rescue tottering State electricity distribution utilities (discoms) the sector continues to be in a mess.
  • Discoms of States such as Tamil Nadu, Madhya Pradesh and Maharashtra have defaulted on their PPA obligations forcing the Centre to consider options such as giving more powers to regulators to penalise them. This is not surprising because UDAY was an effective scheme to address the symptoms of the disease but not the disease itself.
  • The basic problem is one of a mismatch between the revenues and expenses of the discoms. It appears that in general, in the 10 states that signed up for UDAY, upward tariff revisions have not gone into effect.
  • According to the Central Electricity Authority, the average revenue realised by discoms per unit of electricity distributed by them is 3.76 while their cost of supply is 5.01 a unit, which is a deficit of 1.25 a unit straightaway.
  • The overall picture is, however, worrying. It suggests that state electricity regulators are still not following one basic principle: that distribution companies must be allowed to charge prices that do not just reflect the cost of purchasing power, but also the cost of delivery and a reasonable return on capital.
  • At the time of its launch, observers worried that UDAY did not create any structural reform that would end this dynamic – and the experience so far bears out these concerns.
  • Unfortunately, it appears that – although the distribution companies may have petitioned for proper tariff increases – most state electricity regulators continue to be pressured by state governments to spare their constituents the necessary tariff hikes.
  • The West Bengal and Delhi governments, in particular, made the nature of this pressure transparent in the past.
  • The poor realisations can be attributed to two factors.
  • First, the increasing base of rural electricity supply which is typically highly subsidised and non-remunerative,
  • And second, the inability to control aggregate technical and commercial (AT&C) losses.
  • Similar worries have been set off by the latest scheme, Saubhagya, which promises free connections to village houses. While the supply will be billed, it will be at a subsidised rate. The puzzle for States is one of subsidising the supply.
  • The biggest failure of electricity reforms in the last decade and more is on the AT&C front. Though it has reduced from the time when reforms began, AT&C losses at around 22 per cent are still double the global average. Pilferage of power and free agricultural supply are the villains here.
  • A recent study by ratings agency Crisil shows that as much as 21,000 MW of private coal-fired generation capacity is under stress for various reasons, including non-payment of dues by discoms.
  • Clearly, State governments have to take the issue of discom health seriously and reform their ways of functioning.
  • They have no choice anyway because under UDAY the share of discom losses that they have to bear will grow from 5 per cent in 2016-17 to 10 per cent this fiscal, and eventually to 50 per cent by 2019-20.

There are two key aspects to reforming discoms.

  • First, reducing technical and commercial losses. Average T&C losses in India are 25 per cent — double the global average. This would require improved metering and cutting down on illegal connections, among other things.
  • Second, allowing discoms to align electricity tariffs to the cost of power. Traditionally, discoms cannot charge what it costs them and as such they cannot come out of the debt cycle.
  • Institutional safeguards for state electricity regulators are necessary so that they are less prone to being pressured by state governments.

Conclusion

  • If the Centre wants UDAY to succeed, then it must not just work on this important structural reform – and, in the interim, put direct pressure on states to fulfil their end of the bargain.
  • States should no longer be subject to a moral hazard – they should not feel that populism will go rewarded with another bailout in the future.
  • A warning should be issued that states that do not co-operate with UDAY in both letter and spirit will be barred from any further round of reform-linked incentives.

 

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