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Cover Story | March 2018

UDAY will take 4-5 years to turnaround power discoms

<span style="font-weight: bold;">Kameswara Rao, Partner, PricewaterhouseCoopers<br /> <br /> Discuss UDAY's impact&nbsp; on demand?&nbsp; </span><br /> The growth in power demand accelerated significantly in the current financial year. UDAY is certainly a key contributor to this because the immediate savings in cost (the restructuring plan, on an estimated basis, reduced interest costs by as much as 47 paise per kWh), allowed utilities to maintain tariffs at lower levels, thus attracting more marginal consumers. The fiscal space also allowed utilities to procure additional supplies to meet demand. Clearly, many other factors too affect the growth in electricity use. <br /> <br /> <span style="font-weight: bold;">What is the progress on increasing power tariffs? How will the political be a catalyst in this?</span><br /> This has been a major disappointment too. The state utilities and regulators have allowed the reduction in interest cost to be passed entirely in tariffs, instead of retaining some of it to drive performance improvement to reduce losses. So, except in one state, tariff increases have been nil or barely 5 per cent in most states, and represent an opportunity lost. The government's actions to monitor progress of the utilities under the scheme's provisions too has waned at a state level, and as a result, progress on operational improvements has slowed. The state governments could have proactively used this opportunity to turnaround the discoms, which would have removed the subsidy burden and allowed them profitably, divest.<br /> <br /> <span style="font-weight: bold;">How long will UDAY take to turnaround power discoms? </span><br /> This will depend on the pace of investments and process improvement, for example, for system strengthening, feeder metering, getting larger consumers on smart meters, DSM measures to reduce usage in unviable areas, etc. This could take 4-5 years in the best of the circumstances. <br /> <br /> A superior option for the state government is to use private sector participation in the form of district-level input-based franchisees. This can expedite recovery of losses, allow a larger area to be covered by issuing multiple contracts, and save scarce capital for the government. <br /> <br /> <span style="font-weight: bold;">Are there any visible signs of the state discoms signing new power purchase agreements (PPAs)?</span><br /> This should not be a prominent complaint, because capital intensive industries typically do go through periods of high and low utilisation depending on the investment cycle. <br /> <br /> The key issue should be for discoms to contract sufficient capacity to meet all their projected demand. The current freedom offered by low plant load factor (60 per cent) is not that large if adjusted for age, plant condition, fuel availability, cost, transmission constraints etc., and states can quickly descend into power shortages. Given this, state utilities and regulators should assess additional demand that will come from current load, addition of new households under the Saubhagya scheme and uptick in industrial demand. These actions, viz., to estimate and initiate process to contract new PPAs, is not yet evident at state level and will have to be done soon.<br />
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