UDAY Scheme for Discoms

Why central government schemes for discoms have not worked

Note4Students

From UPSC perspective, the following things are important :

Prelims level : UDAY

Mains level : Paper 3- Schemes for discoms and issues with them

Context

A recent report of Niti Aayog has assessed the losses of discoms to be about Rs 90,000 crore in 2020-21.

Central government schemes for discoms

  • In 2001, the Accelerated Power Development Scheme was initiated.
  • This was followed by various other schemes with some differences between them.
  •  The government had launched the UDAY scheme in 2015.
  • UDAY did not involve any monetary assistance to the states, but only promised to help the states in reducing the cost of power through coal linkage rationalization, etc.
  • Recently, the government launched a new scheme with a total outlay of around Rs 3.03 lakh crore.
  • It seeks to improve the distribution infrastructure of the distribution companies (discoms) with the primary intention of improving their financial health.
  • The objective of the scheme is to bring down commercial losses in the range of 12-15 percent and also reduce the difference between the average cost of supply (ACS) and average revenue realized (ARR) to zero by 2024-25.
  • The problem with all these schemes (including UDAY) is that they have not been delivered and the financial position of the discoms has only worsened.

Why did schemes fail to improve the financial health of discoms?

  • Reduction of loss is a managerial issue: Reduction of commercial losses is not really about improving infrastructure, it is more of a managerial issue.
  • The average loss (inclusive of technical and commercial) is about 22 percent today.
  • But several discoms have losses in excess of 40 percent.
  • It is possible to bring down losses from 40 percent to about 15 percent without any significant investments in infrastructure.
  • Investments, however, would be required to bring down losses further to a single-digit level.
  • The governance issues of the scheme is a complex issue.
  • The two most popular parameters which are monitored are the loss levels and the difference between the ACS and ARR.
  • There are inherent problems with these parameters since they keep fluctuating and it is very difficult to fathom their trend on a quarter-wise basis, rendering the release of funds to be tricky and cumbersome.
  • In the scheme now announced by the government, about 26 parameters will be taken into consideration and assigned a score.
  • For some of the parameters, it may be difficult to assign a score across discoms which may lead to some amount of subjectivity.

Way forward: Alternate approach

  • Provide transitional financial support: An alternate approach that could be considered by the Centre (in lieu of such assistance schemes) is providing only transitional financial support to all discoms, which are privatized under the private-public partnership mode. 
  •  A transitional support of Rs 3,450 crore spread over five years proved to be exceedingly beneficial in the case of discoms in Delhi.
  • Promote privatization: Since in an earlier policy statement the government had mentioned that privatization of discoms is to be promoted, it would make sense to consider this transitional support as a catalyst.

Conclusion

Adopting this approach will ensure that the central government moves away from the micro-management of discoms, which inevitably happens if the release of funds is linked to reform-linked parameters on a quarter-wise basis.

 

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