Will UDAY Deliver?

An update on the scheme’s progress over the past year

The Ujwal Discom Assurance Yojana (UDAY) has been one of the biggest initiatives taken by the government to improve the efficiency of the power distribution companies reeling from financial losses. After almost three years of its launch in November 2015, while UDAY has not proved to be a game changer, it has certainly brought about a difference in the state of the discoms. As per experts, the scheme has seen mixed success. The two key performance parameters, aggregate technical and commercial (AT&C) losses, and the gap between the average cost of supply (ACS) and the average revenue realised (ARR), have recorded visible declines. AT&C losses have reduced from 18.76 per cent as of March 31, 2018 to 18.76 per cent as of March 31, 2018 and the ACS-ARR gap has decreased from Re 0.59 per unit in 2015-16 to Re 0.21 per unit in 2017-18. Further, the debt takeover by the state governments has helped reduce the interest burden and financial losses of discoms, thus improving their financial performance. However, the net results of UDAY have not been in line with the targeted trajectory. Also, given the current rate of progress under the scheme, the final targets might not be achieved by the end of 2018-19.

Power Line takes a look at the developments under UDAY, the challenges that remain and the future outlook…

Decline in debt and losses

Under UDAY, the state governments were required to take over 75 per cent of the discoms’ debt and issue bonds to the lenders. Debt worth Rs 2.7 trillion has to be restructured under UDAY, that is, over 60 per cent of the total debt of Rs 4.3 trillion as of September 30, 2015. Of the Rs 2.7 trillion debt, the states and discoms have issued UDAY bonds worth Rs 2.3 trillion. The debt takeover by state governments and the subsequent reduction in debt servicing rates from 11-12 per cent to 7-8 per cent have helped achieve savings in interest costs. Reportedly, the financial losses of UDAY discoms declined to Rs 148.33 billion as of December 2017 from Rs 346.56 billion and Rs 515.9 billion as of March 2017 and March 2016 respectively.

Operational performance

A key impact of UDAY has been the reduction in the AT&C losses of discoms participating in the scheme from 22 per cent to 18.76 per cent as of March 31, 2018. The discoms that reported a signifcant declined in their AT&C losses in 2017-18 over 2016-17 were the Himachal Pradesh State Electricity Board (59 per cent decline), Mangalore Electricity Supply Company Limited (47 per cent), Eastern Power Distribution Company of Andhra Pradesh Limited (35 per cent), Assam Power Distribution Company Limited (34 per cent), Jaipur Vidyut Vitran Nigam Limited (33.8 per cent), Manipur State Power Distribution Company Limited (33 per cent) and Kerala State Electricity Board Limited (30 per cent). Around 14 discoms are already operating at or below the benchmark level of 15 per cent AT&C losses. Eight of these 14 discoms are in the states of Gujarat, Karnataka and Andhra Pradesh.

At the same time, many discoms reported an increase in their losses. These included Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company, Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company, Punjab State Power Corporation Limited, Uttarakhand Power Corporation Limited, Northern Power Distribution Company of Telangana Limited, Gulbarga Electricity Supply Company Limited and Bangalore Electricity Supply Company Limited. With respect to cost recovery in the power distribution segment, the overall ACS-ARR gap reduced to Re 0.21 per unit in 2017-18 from around Re 0.58 per unit in 2015-16. A total of 17 states witnessed a reduction in the ACS-ARR gap between 2016-17 and 2017-18. States including Rajasthan, Andhra Pradesh and Assam recorded a significant reduction in the ACS-ARR gap. However, in around eight states, the gap widened. These include Chhattisgarh, Mizoram, Meghalaya and Jammu & Kashmir. Amongst all the states, Sikkim recorded the highest ACS-ARR gap of Rs 5.65 per unit as of March 31, 2018. Meanwhile, Himachal Pradesh, Rajasthan, Maharashtra, Gujarat and Puducherry achieved the target of zero ACS-ARR gap.

Controlling costs

One of the key objectives of UDAY is to reduce discoms’ power purchase costs (PPC), which constitute over 70 per cent of their total costs. The average PPC for UDAY states stood at Rs 4.18 in 2015-16, which increased to Rs 4.23 in 2016-17 and is estimated to be around Rs 4.24 per unit in 2017-18 (till December 2017). While the costs have gone up, the increase in costs has been significantly lower than the 7.5 per cent increase in 2015-16. Further, this is a negligible increase given the hike in coal price, environmental cess and rail freight. Factors that have helped in reducing the PPC include the substitution of imported coal, coal linkage rationalisation, coal swapping and third-party coal sampling, and regular compliance with merit order despatch.

Challenges continue

While the transfer and refinancing of over 86 per cent of the scheduled debt under UDAY has been a remarkable progress for the discoms, it has had an adverse impact on state finances. It has not only added to the fiscal deficit of the state, but has also not taken into account the future losses that might occur. Further, sector experts are of the view that the scheme cannot resolve the distribution segment’s issues merely by the takeover and restructuring of debt. There is a need to reduce AT&C losses and bridge the ACS-ARR gap. As per the UDAY dashboard, the overall AT&C losses for UDAY states stood at around 23 per cent as of September 25, 2018, higher than the level achieved at the end of 2017-18 and far above the target loss level of 15 per cent to be achieved by the end of the current fiscal. The decline in losses, therefore, is not only slow, but also inconsistent and unstable. Rise in power theft during phases of high demand; uncertain revenue collection and delays in the release of subsidy (generally disbursed towards the end of the year); affect AT&C losses. These factors have an impact on the ACS-ARR gap as well. The absence of rational tariffs, as well as  delays in payments by large consumers like state government departments and the timely release of subsidies have made it difficult for the discoms to comply with the UDAY targets. As of December 2017, the total dues of government departments in the UDAY states were almost Rs 400 billion.

Meanwhile, smart metering progress has been rather sluggish with only 1.5 per cent of the targeted number of smart meters installed so far. The high cost of implementation, lack of skilled manpower, data integration and interoperability issues, and loopholes in the scheme structure have resulted in the slow uptake of smart meters. As per the UDAY, smart meters are to be installed on a consumption basis (for all consumers with a monthly consumption of more than 200 units). This means that smart meters are to be dispersed geographically, which will pose considerable operational, logistical and project management challenges.

The way forward

In order to improve the financial position of the discoms, tariffs have to be rationalised and collection efficiency needs to be improved. However, discom losses cannot be reduced in a sustained manner unless there is an improvement in the operational performance of the utilities. To further incentivise the loss-making discoms, the Ministry of Power (MoP) has set a strict deadline for them to reduce their AT&C losses to 15 per cent by March 2019. Further, the MoP has issued a directive to financial institutions to refrain from lending to discoms with heavy losses (above 15 per cent). The MoP has also shared a six-point roadmap with discoms for bringing down their losses. The suggested measures include prepaid and smart metering, feeder replacement, adoption of the franchise model and focus on lowering their technical losses while controlling theft. The ministry has also indicated that appropriate amendments will be made to the Tariff Policy so that the regulators do not allow losses of over 15 per cent while determining tariffs after March 2019.

Further, several states have taken their own initiatives to improve the health of discoms. These include Haryana’s Mhara Gaon Jagmag Gaon scheme, Rajasthan’s Mukhya Mantri Vidyut Sudhar Abhiyan, Manipur’s Name and Shame campaigns and prepaid metering, and spot billing in Haryana and Rajasthan. Rajasthan has also adopted the franchise route and awarded four circles to franchisees since 2016 to improve its operational performance. Other states can adopt similar models to achieve their their targets.

Ankita Gupta

 

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