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View Points | February 2017

Discom Dawn

Ashish Agarwal, Director, Infrastructure, Equirus Capital discusses how UDAY is the panacea for state-run power distribution firms.

The domestic power sector has notched remarkable advances over the last few years across the entire value chain. With the highest coal production growth in over two decades adding to fuel supply scalability, augmentation of generation capacities, increase in transmission lines and record consumption levels with the distribution of 2.3 crore LED bulbs, India has emerged as the fifth largest producer and consumer of electricity with a capacity of 302 GW.

Indications are that for the first time since independence, India will become a power-surplus country this year, with overall energy surplus of 1.1 per cent and peak surplus of 2.6 per cent. However, given the fact that more than 30 crore people in India have not availed the benefits of electricity, achieving this landmark is easier said than done.

In these face of the positive metrics, power distribution continues to remain the Achilles Heel for the government as state-run distribution companies (discoms) continued to incur heavy operational losses and remained mired in a vicious debt cycle with accumulated losses of around Rs 3.8 lakh crore and outstanding debt of Rs 4.3 lakh crore in 2014-15, with interest rates of 14-15 per cent.

Losses incurred by discoms can be broadly bifurcated into commercial and technical categories. Use of modern technology and advanced equipment can help to mitigate losses incurred owing to technical factors. Losses on account of commercial issues can be managed by charging tariffs for all consumer categories and not providing free electricity to selected groups.

We can mitigate losses in the sector by:
- Refusing to buckle under political pressure to give away electricity freely.
- Factoring in the production, transmission, input
and distribution costs along with a healthy profit margin and not based on political expediency in deciding the electricity prices.
- Reducing the occurrences of electricity thefts by unscrupulous people or entities.

Plugging the power distribution anomalies and creating a reliable generation and distribution machinery which can ensure adequate supply of electricity at affordable rates on a sustained basis to retail consumers along with helping maintain the growth momentum of the agriculture, manufacturing and services sectors has been a major challenge area for the government.

The solution here is financial empowerment of the discoms which, in turn, can act as change-agents in executing schemes for 100 per cent electrification of rural areas, 24x7 power supply and providing clean energy. With a view to reviving the operational efficacies of discoms through a financial reform model, the Narendra Modi-led Government approved the Ujwal Discom Assurance Yojana in November 2015.

The scheme, an initiative of the Union Power Ministry, has been formulated to enable loss-incurring discoms to enhance their productivity levels by popularising energy-saving LED bulbs, mandating smart meters and upgrading transformers. UDAY has also sought to reduce burgeoning power bills through increasing the supply of cheaper domestic coal, coal swaps on a liberal basis to efficient power generation plants, supplying washed and crushed coal and onus on speedy set-up of transmission lines.

Financial regulation is a key aspect of UDAY´s revival agenda with the scheme seeking to minimise interest cost of discoms by recommending states to take 75 per cent of discom debt for two years commencing September 30, 2015, 50 per cent debt in 2015-16 and 25 per cent in 2016-17.

UDAY further proposes the conversion of debt not taken over by states into loans with interest rates not exceeding the bank´s base rate plus 0.1 per cent and 50 per cent of future discom losses to be funded by states along with mandating financial controls by aligning them with state finances.

A tri-partite agreement between the Union Ministry of Power, the concerned state government and the discom brings into effect the scheme. And already, 16 states have adopted it though it is optional.

Eight of the 16 states, which have jumped on the UDAY bandwagon, including Bihar, Uttar Pradesh, Jharkhand, Chhattisgarh, Goa, Uttarakhand, Rajasthan and Andhra Pradesh, have seen their distribution losses fall significantly.

If one considers the case of Uttar Pradesh, there has been a 65 per cent decline in the gap between electricity generation and supply cost and the revenue earnings. As compared to Rs 1,742 crore last fiscal, discoms in UP recorded a nearly 50 per cent drop in their interest burden to Rs 820 crore in April-June 2015.

In a similar manner, Jharkhand also witnessed a fall in commercial losses to 31.8 per cent in Q1 of the current fiscal year from a loss of 41 per cent recorded earlier. Reports hint at the fact that there was a 13 per cent decline in the domestic average power generation cost to Rs.2.77 per unit in the quarter ending June 2016 from Rs.3.19 per unit in April-June 2015.

The Ministry of Power and Renewable Energy has initiated steps to incentivise states implementing UDAY standards by providing additional central funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDGJY), Integrated Power Development Scheme (IPDS), Power System Development Fund (PSDF) and other relevant schemes. The scheme also has the potential to commence the state power generation capex.

In a nutshell, UDAY has been formulated as a sure-fire initiative for power distribution companies to help clear their balance sheets and boost their revenue-earning capacities. It has also been devised to make them commercially viable and technologically competent.

The scheme would also help in largely alleviating transmission and distribution losses along with rationalising coal supplies, resulting in optimum utilisation of valuable fuel resources and garnering huge savings in return.

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