UDAY Scheme for Discoms

Fiscal support to the power sector


From UPSC perspective, the following things are important :

Prelims level : UDAY scheme

Mains level : UDAY scheme, its success and failures

Part of the package announced by Finance Minister was a Rs 90,000-crore liquidity injection into power distribution companies (or discoms).

Practice question:

Ujwal DISCOM Assurance Yojana (UDAY) has failed to turn around the precarious financial position of state power DISCOMs in India. Discuss.

Fiscal push for DISCOMs

  • The move is aimed at helping the discoms clear their dues with gencos (or electricity generation companies), who in turn can clear their outstanding dues with suppliers, such as coal miners, easing some of the working capital woes of Coal India Ltd and contract miners.
  • This is subject to the condition that the Centre will act as guarantor for loans given by the state-owned power finance companies such as PFC and REC Ltd to the discoms.

Why was this needed?

  • The primary trigger is the poor financial condition and revenue collection abilities of most state discoms.
  • This is despite several interventions, including a scheme called UDAY that was launched in 2015 to fix the problems of a sector where the upstream side (electricity generation) was drawing investments even as the downstream (distribution) side was leaking.

How do the DISCOMs work?

To understand how the sector works, we have to imagine a three-stage process.

  • First stage: Electricity is generated at thermal, hydro or renewable energy power plants, which are operated by either state-owned companies or private companies.
  • Second stage: The generated electricity then moves through a complex transmission grid system comprising electricity substations, transformers, and power lines that connect electricity producers and the end-consumers.
  • The entire electricity grid consists of hundreds of thousands of miles of high-voltage power lines and millions of miles of low-voltage power lines with distribution transformers that connect thousands of power plants to millions of electricity customers all across the country.
  • Third stage: This last-mile link is where discoms come in, operated largely by state governments. However, in cities such as Delhi, Mumbai, Ahmedabad, and Kolkata, private entities own the entire distribution business or parts of it.

Why there is a problem?

  • Discoms essentially purchase power from generation companies through power purchase agreements (PPAs), and then supply it to their consumers (in their area of distribution).
  • The key issue with the power sector currently is the continuing problem of the poor financial situation of state discoms.
  • This has been affecting their ability to buy power for supply, and the ability to invest in improving the distribution infrastructure. Consequently, this impacts the quality of electricity that consumers receive.

There are two fundamental problems here:

1) Lack of competitiveness

  • One, in India, electricity price for certain segments such as agriculture and the domestic category (what we use in our homes) is cross-subsidised by the industries (factories) and the commercial sector (shops, malls).
  • This affects the competitiveness of the industry.

2) Transmission and distribution losses

  • There is the problem of AT&C (aggregate transmission and distribution losses), which is a technical term that stands for the gap in the bills that it raises and the final collection process from end-consumers.
  • As a result, the discoms are perennially short of funds, even to pay those supplying power to them, resulting in a cascading impact up the value chain.

Back2Basics: UDAY Scheme


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