UDAY

• Min. of Power has launched Ujwal Discom Assurance Scheme (UDAY)
• India generates surplus power but the practical experience of Indians is that scheduled and unscheduled power cuts are the norm in cities, and the situation in most rural areas is worse.India lags far behind other countries in per capita consumption of power

• The explanation for this situation lies in the state of the state-owned power distribution companies, or discoms, which are responsible for buying electricity from the generation companies and selling them to consumers. The discoms suffer massive transmission and distribution (T&D) losses. Almost 25 per cent of the power is lost, and never gets billed for — double the global average of about 12 per cent.

• The remaining 75 per cent is sold at prices that are much lower than the discoms’ procurement costs. In every state, the tariff is set by a group of largely political appointees, who avoid increasing rates. Political unwillingness is at the heart of the T&D losses as well. Plugging them would require widespread metering and clamping down on illegal connections, and neither is politically easy.

• As of March 2015, the state-owned discoms’ accumulated losses were more than 3.5 per cent of the GDP. The piled-up losses and drying up of working capital has pushed the discoms deep into debt.

• As the discoms try to retain financial viability, they were ironically forced to decrease their businesses. This, sent the power generators into a indecisive state  — and led to a crash in spot prices of electricity from Rs 7.75 per unit in 2010 to Rs 2.56 in 2015.

So, What Next?

• The union cabinet announced a new scheme — UDAY, or Ujwal Discom Assurance Yojna. Under UDAY, participating state governments (it is not a compulsory scheme) would “take over 75 per cent of discom debt as on September 30 over two years” — 50 per cent in 2015-16 and 25 per cent in 2016-17. The idea is to make the state governments formally responsible for the losses of state-owned discoms.

• The balance 25 per cent of the debt is to be serviced through state government-guaranteed bonds issued by the discoms.

• This is expected to have two effects. One, it will relieve debt-ridden discoms, who can push power distribution in right earnest instead of being a roadblock to economic growth. Two, the more overt acceptance of debts by states on their books will push them to align tariffs to costs, and make it possible for discoms to run on a sustainable basis.

• Government of India will not include the debt taken over by the States as per the above scheme in the calculation of fiscal deficit of respective States in the financial years 2015-16 and 2016-17.

• States will issue non-SLR including SDL bonds in the market or directly to the respective banks / Financial Institutions (FIs) holding the DISCOM debt to the appropriate extent.

• DISCOM debt not taken over by the State shall be converted by the Banks / FIs into loans or bonds with interest rate not more than the bank’s base rate plus 0.1%. Alternately, this debt may be fully or partly issued by the DISCOM as State guaranteed DISCOM bonds at the prevailing market rates which shall be equal to or less than bank base rate plus 0.1%.

How will this help?

• UDAY assures the rise of vibrant and efficient DISCOMs through a permanent resolution of past as well as potential future issues of the sector. It empowers DISCOMs with the opportunity to break even in the next 2-3 years. This is through four initiatives (i) Improving operational efficiencies of DISCOMs; (ii) Reduction of cost of power; (iii) Reduction in interest cost of DISCOMs; (iv) Enforcing financial discipline on DISCOMs through alignment with State finances.

• Operational efficiency improvements like compulsory smart metering, upgradation of transformers, meters etc., energy efficiency measures like efficient LED bulbs, agricultural pumps, fans & air-conditioners etc. will reduce the average AT&C loss from around 22% to 15% and eliminate the gap between Average Revenue Realized (ARR) & Average Cost of Supply (ACS) by 2018-19.

• Reduction in cost of power would be achieved through measures such as increased supply of cheaper domestic coal, coal linkage rationalization, liberal coal swaps from inefficient to efficient plants, coal price rationalization based on GCV (Gross Calorific Value), supply of washed and crushed coal, and faster completion of transmission lines. NTPC alone is expected to save Rs. 0.35 / unit through higher supply of domestic coal and rationalization / swapping of coal which will be passed on to DISCOMs / consumers.

• Financial liabilities of DISCOMs are the contingent liabilities of the respective States and need to be recognized as such. Debt of DISCOMs is de facto borrowing of States which is not counted in de jure borrowing. However, credit rating agencies and multilateral agencies are conscious of this de facto debt in their appraisals. In line with the above and similar observations of Fourteenth Finance Commission, States shall take over 75% of DISCOM debt as on 30 September 2015 over two years - 50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17. This will reduce the interest cost on the debt taken over by the States to around 8-9%, from as high as 14-15%; thus improving overall efficiency. Further provisions for spreading the financial burden on States over three years, will give States flexibility in managing the interest payment on the debt taken over, within their available fiscal space in the initial few years. A permanent resolution to the problem of DISCOM losses is achieved by States taking over and funding at least 50% of the future losses (if any) of DISCOMs in a graded manner.

Incentive structure

• States accepting UDAY and performing as per operational milestones will be given additional / priority funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY),Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such schemes of Ministry of Power and Ministry of New and Renewable Energy.

• Such States shall also be supported with additional coal at notified prices and, in case of availability through higher capacity utilization, low cost power from NTPC and other Central Public Sector Undertakings (CPSUs).

• States not meeting operational milestones will be liable to forfeit their claim on IPDS and DDUGJY grants.

• UDAY is optional for all States. However, States are encouraged to take the benefit at the earliest as benefits are dependent on the performance.