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Power sector is under pressure UDAY’s shortcomings [Mains Articles]

Launched in November 2015, the Ujwal DISCOM Assurance Yojana (UDAY) was designed to turn around the precarious financial position of state distribution companies. However, Discom losses have rebounded in FY 2019 to nearly double the losses recorded the previous year.
By IT's Mains Articles Team
January 01, 2020

Contents

  • Introduction
  • Current situation of DICOM companies in India
  • What are AT&C Losses?
  • Is UDAY a total failure?
  • The two previous attempts
  • Reason for failure of UDAY scheme
  • What is the possible resolution?
  • Way forward

Power sector is under pressure UDAY’s shortcomings

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Introduction

The state power distributors continue to be in the intensive care unit (ICU) when government wants to pursue a target of 24×7 electricity for all and also wants to attract investors in power sector. The UDAY scheme has run aground after having provided some relief from the accumulated liabilities of the Discoms.

Power sector is under pressure UDAY’s shortcomings

Current situation of DICOM companies in India

Current situation of DICOM companies in India

  • The losses of discoms, which had reduced in 2016-18, have nearly doubled in 2019 to INR 28,036 crore.
  • Discoms also lagged behind in eliminating the gap between the average cost of supply and realisable revenue (ACS-ARR gap). The gap of INR 1.5 lakh crore, despite the states providing support of close to Rs 85,000-90,000 crore to distribution utilities.
  • Discoms have also missed the FY 2019 UDAY target to bring down their aggregate technical and commercial (AT&C) losses to 15 %.
  • According to the government’s Payment Ratification and Analysis in Power Procurement for bringing Transparency in Invoicing of Generators (PRAAPTI) web portal, outstanding dues to power generators had risen to Rs 81,964 crore at the end of October 2019 from Rs 54,664 crore in the same period last year. 
  • Discoms across states have already started defaulting on power purchase agreements signed with renewable energy players.
  • With the coupon rate on UDAY bonds at a premium over those on state-development-loans bonds, the cost of debt servicing has gone up for these states.

Ujjwal Discom Assurance Yojana (UDAY)

  • Launched in November 2015, the Ujjwal DISCOM Assurance Yojana (UDAY) was designed to turn around the precarious financial position of state distribution companies (discoms)
  • The scheme had three critical components:
  1. Takeover of discoms debt by state governments
  2. Reduction in aggregate technical and commercial (AT&C) losses.
  3. Timely tariff revisions and elimination of the gap between the average per unit cost of supply (ACS) and average revenue realised (ARR) by FY19.
  • The state governments took over 75 % of the debt of their discoms, issuing lower-interest bonds to service the rest of the debt.
  • In return, discoms were given target dates (2017-19) to meet efficiency parameters like reduction in power lost through transmission, theft and faulty metering.
  • There are indications that the turnaround hasn’t materialised, with several targets being missed.

What are AT&C Losses?

  • The concept of Aggregate Technical & Commercial losses provides a realistic picture of loss situation.

What are AT&C Losses

  • It is combination of energy loss (Technical loss + Theft + inefficiency in billing) & commercial loss (Default in payment + inefficiency in collection).

Is UDAY a total failure?

The scheme showed some positive results such as:

Is UDAY a total failure

  • Of the 28 states that implemented it, 10 have shown either reduced losses or profits in FY ’19.
  • Most UDAY states registered an improvement in reducing the ACS-ARR gap and in bringing down AT&C losses.
  • However, states are way behind in achieving the targets as per the UDAY schedule — a trajectory that bears similarity to how the two previous attempts had run aground.

The two previous attempts

  • In 2001, the government launched the Accelerated Power Development and Reforms Programme (APRDP) to bring down the AT&C losses of discoms by providing them grants to upgrade their transmission infrastructure, which the discoms were unable to subsequently use due to several reasons.
  • Again in 2008, the government relaunched it as Restructured Accelerated Power Development and Reforms Programme (R-APDRP).

Reason for failure of UDAY scheme

  1. At the aggregate level, the AT&C losses for major states stood at 19.05 % as against the target of reducing them to 15 % by the end of FY19. Only around seven states had recorded losses of less than 15%.

Ujjwal Discom Assurance Yojana (UDAY)

  1. While the ACS-ARR gap was supposed to be eliminated by FY19, it remains as high as Rs 0.25 per unit. Part of the problem can be traced to inadequate tariff hikes. Currently, only four states — Himachal Pradesh, Gujarat, Maharashtra and Karnataka — had recorded an ACS-ARR below 0, while the rest recorded gaps ranging from Rs 0.01/unit to Rs 2.13/unit.
  2. There’s also the issue of whether the power subsidy released by state governments is adequate. As a result, discoms have reported financial losses.
  3. Dues by state discoms to power generators have risen.
  4. There are several other operational efficiency targets under UDAY, such as feeder metering, smart metering and feeder segregation on which the progress is mixed. For instance, not much progress has been made in the case of smart metering above 200 and upto 500 kwh and above 500 kwh.
  • The Appellate Tribunal for Electricity (APTEL) noted that, between 2015-16 and 2018-19, it had not received any compliance reports related to its earlier orders.

What is the possible resolution?

  • Government is preparing A new scheme as a kind of replacement for UDAY. In the revised scheme, discoms can only remain in the public sector if they get to a situation where their deficit is under control. Or else, states will be asked to implement different models involving the private sector, like the franchise or PPP models.
  • The Centre is also likely to back up the new scheme by providing some grant support, which it did not do in UDAY.

Way forward

One can achieve certain targets in the short term by doing some financial engineering and providing some financial package. But, in order to sustain that improvement, there is need to have efficiency gain in that system. 

The AT&C losses need to go down, and billing and collection efficiencies should go up. The power sector won’t revive by just generating profit or minimising loss by increasing tariffs.

 

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