In November 2015, the cabinet had approved the first Ujwal Discom Assurance Yojana (UDAY) for the financial turnaround of the discoms. In December 2018, the power minister stated that while UDAY has done well in reducing the debt burden of discoms, a proposal for UDAY II is being discussed to take forward the work done in the first leg and fill the gaps that remain. Power Line invited sector experts to comment on the need, benefits and requirements of the proposed scheme. Excerpts…
Does the distribution segment need another round of intervention through UDAY II?
The precarious financial position of discoms is going to get worse in the coming years owing to the emerging trends and disruptions in the sector.
- The average cost of supply (ACS) for most discoms is already above Rs 7 per kWh, growing at an average rate of 6 per cent per annum. This is largely being driven by the high cost of baseload coal-based power contracted in the past decade. A significant proportion of this capacity is underutilised and responsible for 15-30 per cent of the fixed cost payments in many states. Transmission and distribution costs are also increasing substantially owing to network expansion and sector inefficiencies.
- Discoms are witnessing a significant reduction in cross-subsidising revenue on account of open access, captive consumption and rooftop solar. This trend is significant despite procedural hurdles and high cross-subsidy surcharge due to non-competitive discom tariffs. Open access sales are comparable to 20 per cent of high tension (HT) sales and captive consumption accounts for 20-30 per cent of the total discom sales in many states. The uncertainty in demand will intensify with the increasing viability of renewable energy options. Currently, around 70 per cent of the non-agricultural sales of a discom are on account of consumers paying energy charges higher than the average price of rooftop solar power.
- Reports suggest that the country has provided electricity connections to 120 million rural households since 2011. With this remarkable achievement, there is also a need to increase tariff support to ensure affordable supply to the newly electrified households. The limited scope for tariff increase for small consumers, falling cross-subsidy and the rising cost of supply would require an increase in subsidy. However, subsidy growth has barely been keeping pace with the increase in the cost of supply for discoms.
Besides these trends, the sector is battling challenges such as persistent aggregate technical and commercial (AT&C) losses, metering and billing issues and poor power quality. Urgent steps are needed to address the inevitable loss of cross-subsidy and the rising cost of supply. In this context, financial support from the state and central governments will be required in the medium term. This could be in the form of bailout measures or subsidy support.
In terms of scope, the current scheme, UDAY I, has the right ingredients as it aims at both financial turnaround and operational improvement of the power distribution companies. From the balance sheet perspective, there has been some improvement in discom financials since the launch of the scheme. However, in terms of operational performance, the discoms have shown mixed results. While there is some improvement in AT&C losses, the progress in distribution transformer metering (rural and urban), feeder segregation and smart metering has been slower than expected. However, the scheme seems comprehensive and progressive to us and should continue to be pursued.
In the past also, we have seen the financial restructuring of discoms, which has not achieved the desired objectives. Earlier attempts at restructuring were quick fixes for a problem that was much deeper and had its roots in high AT&C losses and sustained under-recovery of costs. In this backdrop, if at all some intervention is required in the power distribution segment, it should be focused on operational improvement such that power distribution companies remain/become commercially viable organisations.
With large programmes like the R-APDRP, UDAY and Saubhagya in their last phases, there is a need for the central government to plan and implement programmes to assist states and their utilities in improving their operational performance. With anticipated changes including content and carriage segregation and large customer additions across the country, it will be useful to develop a plan to align the state utilities with the future transformation.
How do you think UDAY has fared so far?
To the extent of taking over the past discom liabilities (accumulated till the launch of the scheme), UDAY has been successful. Nevertheless, UDAY was designed to make the state governments progressively take over the previous year’s liabilities in a phased manner. It is not clear how much of the liabilities accumulated after the launch of the scheme have been taken over. Like previous bailout schemes, UDAY specified several performance conditions and trajectories to improve the financial viability of the discoms. Some of the parameters are reported and tracked on the UDAY portal. However, several parameters vital to assess the progress under UDAY are not tracked systematically.
- Reduction in the discoms’ short-term borrowing was one of the objectives of UDAY. In fact, discoms were to limit the working capital requirements to 25 per cent of the previous year’s aggregate revenue requirement (ARR) under UDAY. However, the quantum of short-term liabilities and the working capital loans raised annually are not tracked.
- The revenue subsidies provided by the state governments are 12-20 per cent of the net ARR and their non-payment can increase the revenue gap by two to six times in many states. Despite the mandate in the Electricity Act and the emphasis on timely payments under UDAY, delays in subsidy payments are common and can strain the discoms’ working capital requirement. With increasing subsidy commitments, it is important to report and track the subsidy paid and interest payments incurred due to delays.
- Reduction in AT&C losses is being tracked on the UDAY portal. However, it is not clear if all discoms use the same methodology to estimate losses. The adoption of the methodology prescribed by the Central Electricity Authority would lead to a significant increase in loss reported and it is not clear if this methodology has been adopted.
In addition, parameters relevant to emerging realities should be tracked. These can include the extent of sales migration and revenue erosion due to open access and captive, the extent and costs of backing down/underutilisation of capacity, and the capacity addition plans of discoms, which also have cost implications.
Unless the above-mentioned parameters are reported, it is difficult to provide a clear assessment of how UDAY has fared. However, the fact that future bailouts may be required to aid the sector suggests that rather than a one-time exercise, multiple, continuing and forward-looking measures are required to address the issues in the sector.
UDAY has been a major step taken by the government towards improvement of the financial and operational performance of discoms. Since its launch in 2015, the scheme has brought about improvement in terms of the liquidity position of utilities, largely because it led to reduced interest burden and conversion of discom debt to state government grant/equity. The average cost of borrowing post the implementation of UDAY is estimated to have reduced by 2-3 per cent for utilities. Also, the aggregate book loss of the UDAY states reduced significantly from Rs 515 billion in 2015-16 to Rs 150 billion in 2017-18. Thus, UDAY has met with some success on the financial performance front. On the operational performance front, while there has been improvement, there is a shortfall as compared to the envisaged levels. Moreover, the improvement has remained localised.
It has to be acknowledged that the overall AT&C losses have reduced, from 20.74 per cent in 2015-16 to 18.72 per cent in 2017-18. However, there are about seven discoms that have reported an increase in AT&C losses during this period. The attainment of the 15 per cent benchmark by 2018-19 is thus unlikely to be achieved.
UDAY was aimed at making the state governments accountable and alleviating the burden of high outstanding debt of the distribution utilities, which was limiting their ability to improve their operational performance. It provided targets for metering, AT&C loss reduction and ACS-ARR gap reduction, and involved all stakeholders. On-the-ground performance has improved on every parameter but not at the anticipated pace. Metering has been a sore point in terms of target achievement. UDAY has been successful in improving the governance mechanisms through transparent performance monitoring of utilities at multiple levels using IT tools as well as improved fiscal prudence by putting a cap on borrowing limits. Despite being unable to meet all the initial targets, the programme has put several things in motion, which can now be leveraged for taking the utilities to the next level over the next three to five years.
What should be the key focus areas of UDAY II?
Given the major trends in the sector, change in the discoms’ structure and the nature of operations is inevitable. In this context, the focus should be on:
- Phase-wise migration of HT consumers to open access and captive on a long-term basis in the next three to five years. This will help discoms focus on serving small consumers without the burden of planning for uncertain demand from this segment. This will help avoid new and costly power procurement and rationalise costs.
- New conventional baseload power contracts by discoms should be signed only after scientific demand and resource assessment. This will help prevent build-up of stranded assets. Discoms can also explore cost-optimal options such as short-term or peaking supply contracts, and purchase from exchanges to meet uncertain demand.
- Moving away from cost-plus regulation to performance-based regulation to provide incentives and improve efficiency.
- Initiating a phase-wise reduction of cross-subsidy while protecting the interests of small and marginalised consumers, who may otherwise suffer higher tariffs and poor supply quality due to emerging trends. This can be through technology-based monitoring of supply quality, measures to rationalise tariff design and targeted subsidies.
- Limiting the cost of supply and subsidy requirements to agriculture with progressive and innovative methods to provide daytime solar-based power.
- Tracking key parameters in the sector to provide a clear picture of discom health. This will provide early warning signs before issues balloon to unmanageable levels.
- UDAY II, if implemented, should largely be geared towards improving the operational performance of the utilities. The focus has to be on the reduction of loss levels and reduction/improvement in ACS-ARR gap. Reduction in the power purchase cost and tighter enforcement of regulatory guidelines (with respect to tariff filing and receipt of tariff orders), aimed at achieving cost-reflective tariffs, will help in bridging the ACS-ARR gap. On the loss reduction front, the Ministry of Power has already identified 189 divisions across discoms in eight states, which have AT&C losses of more than 40 per cent, where a 50 per cent reduction in loss is expected to lead to savings of Rs 85 billion annually. The same should be continued with the addition of other divisions. Operational activities like smart meter installation, billing cycle optimisation, feeder segregation, anti-theft raids and human resource allocation are to be monitored regularly with the identification and resolution of bottlenecks.
UDAY II needs to focus on:
- Strengthening regulatory bodies: Enhancing the capacity and ability of regulatory bodies to perform their roles.
- Measures to reduce costs from pithead to customer end: Distribution bears the brunt of padding of costs across the value chain. Thus, there is a need to holistically analyse every segment of the value chain to reduce costs borne by the end customers pertaining to coal procurement, generation, logistics, transmission, operational efficiency, etc.
- Information backbone: Support in creating an IT backbone to get information from source and limit ability of intermediaries to distort information.
- Structural reforms: In terms of enhancing the preparedness of utilities to manage content and carriage segregation, and increasing the involvement of the private sector in segments across the value chain.
- Governance mechanism: The performance of utilities should be monitored and appropriate incentive mechanisms need to be devised for improved performance.