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Special Report | July 2016

Power Sector | Positives to be visible after reset

The UDAY scheme has resulted in increased accountability to the Central government, though implementation feedback has been mixed so far. The common feedback as of now is that UDAY, by design, is a much better scheme than the earlier ones.
The Ujjwal Discom Assurance Yojana (UDAY) scheme is aimed at bringing ailing power distribution companies (discoms) to a state of operational efficiency, with state governments taking over up to 75 per cent of their respective discoms´ debt and issuing sovereign bonds to pay back the lenders. In this connection, ICICI Securities team visited ailing SEBs who are associated or yet-to-be associated to the Centre´s UDAY scheme to assess the ground-level situation.

Following are a few SEB diaries that will give readers a brief idea about on-ground implementation of operational improvement measures suggested under UDAY.

To begin with, ICICI Securities visited the Uttar Pradesh State Electricity Board (SEB) and found out that under UDAY the Uttar Pradesh SEB is expected to incur `50 billion-60 billion additional losses in FY17 as power supply is to be increased in both rural and urban areas before state assembly elections. Higher rural supply leads to higher AT&C losses as the state has 6.5 million unmetered light and fan connections and 1 million unmetered agricultural connections. Industrial consumption of only 25 per cent due to high tariffs (on cross-subsidisation). Industrial consumers are migrating out of the state or moving off-grid. Meanwhile, state implementing web-enabled billing and rural metering - which is likely to result in Rs.24 billion savings. There is an urgent requirement for more junior engineers/officers as JE-to-population ratio needs to improve from current 1:100,000 to 1:40,000. In addition, REC has sanctioned Rs15 billion working capital loan to the UP SEB at 11.9 per cent post implementation of UDAY.

Next in line is Rajasthan. It was found out that under UDAY, the state government will be shifting a debt of around Rs.605 billion of out of the SEB´s total debt of Rs.805 billion (`403 billion in FY16 and Rs.201 billion in FY17). Meanwhile, around Rs.370 billion has already been taken over by the state (by issuing 10-year bonds at 8.21 per cent-8.39 per cent rate of interest). Of this Rs.370 billion, Rs.30 billion has been taken over in the form of an equity infusion and remaining amount as a loan to SEB from the State government.

However, according to Prakash Goel, a research analyst, ICICI Securities, it is not clear whether the State government will charge any interest to SEB for the loan provided. Meanwhile, it was observed that a significant increase in answerability to the Central government post UDAY implementation by the state government. High AT&C loss areas (~700 localities) are witnessing increased load shedding, as they are being supplied power only for four hours per day. In order to limit the overall AT&C losses, automatic meter reading (AMR) is being implemented for MT load as well, in addition to HT load.

In order to curtail AT&C losses, the Rajasthan SEB has started holding engineers responsible for over-consumption at feeders level, which has resulted in ´chargesheeting´ of senior engineers for ´non-performance in loss reduction´. It is evident now that Rajasthan has charge-sheeted 35 engineers for oversupply of power in rural areas and has reduced supply to four hours to areas of excessive theft, and has increased vigilance activity by 50 per cent Y-o-Y. Being charge-sheeted, results in no salary hike for the year and that years´ experience not being considered for promotion eligibility.

What´s more, the Rajasthan SEB will implement ERP systems for better operational integration to optimise its systems and increase their efficiency. The SEB also believes that procurement of short-term power through reverse e-auctions will increase transparency and result in lower costs. It has formed a new company, URJA Vikas Nigam Limited, solely for the purpose of sourcing power. Experts believe these efforts/initiatives will drive cost optimisation and efficiency improvement, helping reduce wastages and leakages.

According to the FY14 PFC annual report on performance of state utilities, agriculture accounts 41 per cent of Rajasthan´s overall power consumption (with ~50 per cent of it being flat-rate customers, who are charged on lumpsum basis, without any metering), which translates into high cross-subsidisation, forcing industries to shift off-grid. Reducing agri consumption to curtail losses would mean lower power demand growth rate.

It was witnessed that the Haryana SEB attempting to overhaul its power distribution infrastructure and systems, as it increases focus on rural areas, and the constraints that it faces.

Similar to the states of Rajasthan, implementation of UDAY has resulted in increased monitoring of operational and financial performance of the Haryana discoms. Additionally, access to funds has improved due to partial takeover of debt by the state and priority funding under Central government schemes.

Of the 75 per cent Haryana´s SEB debt to be taken over by the state government (Rs.259.5 billion of Rs.346 billion), `155.7 billion (45 per cent of total) will be provided to discoms in the form of a state government loan carrying the same rate of interest as the coupon rate of UDAY bonds issued by the state government (8.21 per cent). This means that interest cost-saving on `155.7 billion worth of debt will be limited to the difference between rate of interest of current debt and coupon of UDAY bond.

The Haryana government had launched the Mhara Gaon Jagmag Gaon (MGJG) program in Jul´15 in a bid to provide 24x7 power supply to villages and simultaneously reduce losses by improving billing and collection efficiencies.

  • The scheme involves relocation of electricity meters outside their premises, reduction in low-tension power supply, and replacement of bare conductors with insulated cables, with improvement in collection efficiency being rewarded with increased power supply.
  • First phase of the scheme, which included 83 feeders (310 villages) with minimal power theft, saw significant improvement in collection efficiency and over 10,000 meters being shifted outside their premises.
  • The state government aims to cover 800 rural domestic supply feeders under this scheme by Mar´19 and supply 24x7 power as collection-efficiency improves beyond 90 per cent.

  • Corroborating few findings in Uttar Pradesh, where increase in power supply resulted in lower than expected consumption, it was informed by the officials that in Haryana, an increase in power supply from 12 hours to 18 hours led to only 20 per cent demand increase. Expectations are that sustained power supply increase will drive consumption growth, albeit with a lag.

    However, Haryana discoms are suffering from manpower crunch, forcing them to divert focus from loss reduction to O&M during summers. Attempts to circumvent this issue by hiring private contractors for O&M of LT and 11kv lines resulted in agitation by employees.

    Punjab State Power Corporation Limited (PSPCL, Punjab Discom) was accorded A+ rating by the Ministry of Power for its commendable performance in FY14. So, the question is why Punjab joined UDAY?

    Punjab joined UDAY to avail of the Rs.6.25 billion annual interest cost-saving on takeover of 75 per cent of Discom debt (which will carry a lower rate - 8.51 per cent Punjab UDAY bond coupon rate) and re-pricing of the remaining debt. PSPCL´s working capital loan was around 60 per cent of its revenues before the rollout of UDAY. It borrowed another Rs.55 billion post UDAY. In addition, joining UDAY has helped PSPCL defer a large repayment due in FY17, as the scheme provides a moratorium of five years on loan repayments.

    Meanwhile, it is expected that the upcoming state elections will lead to delay in Discom turnaround as the regulator is not likely to allow tariff hike and pass on the benefit of lower interest rate in UDAY to consumers.

    Another factor that may haunt Punjab is its performance unlike FY14. According to experts there is a limited scope for improvement in A+ rated discom. Punjab´s UDAY MoU puts its FY15 AT&C losses at 16.7 per cent and estimates it to reduce to 16.2 per cent in FY16 - barely 100 bps higher than the 15 per cent target envisaged under UDAY.

    On top of this, higher AT&C loss areas are mostly those adjacent to the international border and mountainous areas on the Himachal border. Discussions with experts lead us to the conclusion that further reductions in AT&C losses will most likely be modest and require disproportionately large investment. Fund allocation under IPDS and DDUGJY schemes is only for system strengthening as the state has already achieved 100 per cent feeder separation, ensured full connectivity and 24x7 power supply.

    On a positive side, PSPCL is also investing in developing infrastructure for automatic meter reading and GIS indexation of meters. The state is unlikely to enter into any new PPA given the under-utilisation of existing PPAs and the resultant high fixed-cost. Punjab SEB already has very high collection efficiency and had successfully implemented ERP. It is now implementing new bill payment technologies and channels like e-wallets, etc. Apart from initiatives for reduction in T&D losses and ERP implementation, PSPCL is also working on shifting the remaining 20% of electricity meters outside homes.

    As per Karnataka government´s policy, six hours of electricity is supplied every day for agricultural consumption (currently three hours in the daytime and 3-4 hours during night). Discoms have floated 1 GW tender for purchase of power for a period of three years in order to increase daytime agri sector supply to six hours. Despite the state having one of the highest proportions of agricultural consumption in the country, Karnataka has managed to overcome the challenges by focusing on operational improvement. The state charges for 10 BHP+ agri-connection at `2.8/unit to keep power theft in check, has achieved 85 per cent feeder separation, does feeder-level accounting, DT metering - yet is still to complete reconciliation for energy audit. Better law and order situation has also aided in keeping AT&C losses in check.

    The Nirantar Jyoti Yojana (NJY) was launched on a pilot basis in FY09. It is the state government´s flagship rural electrification scheme. It aims to provide 24x7 3-phase power supply to rural areas for non-agricultural purposes by segregation of loads. NJY predates the Central government´s Rajiv Gandhi Grameen Vidyutikaran Yojana (later renamed to Deen Dayal Upadhyaya Gram Jyoti Yojana).The NJY scheme is being implemented in two phases at a total estimated cost of Rs.21.2 billion. Despite the ´24x7 Power for All´ scheme document projecting ~10% CAGR in power demand over FY16-FY19, power demand growth is widely expected to be ~5-6%. Exercising caution over supply tie-ups based on overly optimistic demand projections, the Punjab SEB has shifted from its earlier 25-year plan period to 10-year demand-supply planning. Having already signed up significant long-term capacity with state and Central governments, focus now is on keeping power purchase cost under control as the discoms are not likely pay more than Rs.4/kWhr (current most expensive agreement is at Rs.4.97/kWhr).

    To manage demand-supply mismatch on account of delay in capacity commissioning, the Karnataka SEB calls for short and medium term agreements to avoid payment of fixed charges. It has also asked the Ministry of Power to slow down solar capacity addition as existing thermal capacity is underutilized or idle.

    Improvement in southern transmission is being viewed as a very positive development as it will help bring down power prices and smoothen seasonal demand-supply mismatches. However, the state is facing a peculiar situation where growth in ´load´ has outstripped that of consumption; that essentially means people are buying equipment but not running them, hence are idle capacity. Discoms are expected to exercise abundant caution before entering into long term PPAs.

    With discom debt of Rs.60 billion, of which Rs.25 billion is in the form of working capital loan at 9.5 per cent (close to base rate of Canara Bank and Corporation Bank), limited scope for funding under Central government schemes and AT&C losses of less than 18 per cent, there is little need for Karnataka to sign up for UDAY. Like the old say goes, ´if it ain´t broken, why fix it?´

    According to experts, PPA signing spree poses risk of massive oversupply. Against a current peak demand of around 4.1 GW, Odisha´s power supply is likely to reach 9 GW by FY19 (when peak demand is estimated to be around 5.3GW), resulting in serious stress of fixed charges on underutilized capacity.

    Blessed with abundant coal reserves, anticipation of surge in power demand and willingness to participate in merchant market as a supplier, the government of Odisha had entered into 27 MoUs with IPPs (totaling 40 GW capacity) for 12-25 per cent power on the ´cost plus´ basis. While many of these MOUs plant might not see the light of the day, a detailed analysis highlights at least 8 GW out of the total 40 GW capacity have got or will likely get commissioned.

    In addition, Odisha has share of around 7 GW is various state and central PSU owned projects and UMPP. Given the current financial state of the Odisha DISCOMs (`18.1 billion loss in FY14 including losses of GRIDCO, bulk power procurement and trading arm) and unfavourable demand supply situation, experts believe the SEB will be stressed to service the increased capacity charge on underutilised capacity.

    Odisha has been a pioneer in power sector reforms as the state unbundled generation, transmission and distribution activities into professionally separate entities. It also established a bulk power procurement and trading company and was the first state to bring the power sector under regulatory regime by establishing the Odisha State Electricity Regulatory Commission (OSERC). However, the state has an electrification rate of only 56-57 per cent as there was very limited investment in T&D infrastructure for 12 years post privatisation of discoms.

    It was only after 2010 that investment restarted when the government took up infra investment on its own. Currently, the license of the private discom is forfeited (issue currently under litigation). Privatisation of discoms is the reason why the state cannot sign up for UDAY as the government cannot assume liability of private companies. Odisha has sought support of the Central government in untangling itself from the impending supply glut by surrendering its share of allocation in NTPC power plants located outside the state and of other power plants supplying costly power. It has also asked for coal block allocation for state-run power plants to bring down the cost of power procurement.

    Freshly out of election, the state has doubled its number of electricity connections from 8.57 million to 16.37 million between 2011 and 2016 and distribution transformers (DTs) increased from 134,000 to 222,000 over the same period.

    However, majority of these connections were at the lower end of consumer base as the government strived to achieve its poll promises, leading to increased underrecovery for the discom (WBSEDCL - West Bengal State Electricity Distribution Company). Additionally, law and order situation in the state has made theft check and bill collection an onerous task, pushing up under-recoveries further. As per our checks, West Bengal´s AT&C losses for FY16 are likely to be around 30 per cent vs. 25.8 per cent in FY09.

    Meanwhile, due to lack of financial support from the Central government, West Bengal has not agreed to sign up UDAY. Additionally, the state´s weak financial position itself renders it unfit to take over liabilities of the SEB. The state discom´s FY16 revenue gap is estimated to be around Rs.20 billion resulting in creation of regulatory assets. As at Mar´16-end, the discom had accounted for regulatory assets worth Rs.128.4 billion, which is believed now start being liquidated given that the stat elections are over.

    At the end, a section of officials across SEBs acknowledged that UDAY is better designed scheme compared to earlier schemes. While accountability to state and Central governments ensures rigor around operational turnaround, it can turn counter-productive when the level of coordination between the governments is sub-optimal. Besides, certain states have shied away from joining UDAY due to fear of over-involvement of the Centre in SEB activities. Feedback around implementation has been mixed. While we witnessed strong willingness and effort towards operational turnaround in Rajasthan, operational improvement in Uttar Pradesh was limited to certain areas.

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