For decades, electricity distribution in India, largely carried out by state-owned utilities, has been notoriously inefficient. Operationally, power distribution utilities (discoms) have been losing power and money on account of wastage in transmission and distribution, deficient metering and theft.
Financially, these utilities have been taking a hit because of power sales at low tariffs that do not fully recover costs. With price hikes being politically sensitive, most states have kept away from regularly revising tariffs in line with rising electricity costs.
To get the state discom finances in order and infuse efficiency into the ailing power distribution sector, UDAY or Ujwal DISCOM Assurance Yojna was launched by the Centre with much fanfare, last November. While the scheme is well-designed, its success ultimately hinges on the state discoms’ adherence to the path of correction laid out for them.
But, before we go into the details of UDAY, here’s taking stock of the country’s power distribution sector.
Years of inefficiency
So, how bad is the situation? Quite bad, as numbers show. At the country-wide level, 32 per cent of the power generated is wasted by way of operational losses, more precisely known as AT&C (aggregate technical and commercial) losses. These are particularly significant (40-70 per cent) in states such as Sikkim, Arunachal Pradesh, Jammu & Kashmir, Bihar and Jharkhand, with poor and inadequate transmission infrastructure being a contributory factor for the hill states.
Financially, with tariffs not being high enough to cover the cost of supplying power (cost of electricity generation plus distribution), discoms have been losing money on their sales. On an average, on every unit of power sold in 2013-14 (latest available data), the discoms lost ₹1.15. To keep themselves running, discoms have been borrowing heavily from banks. Ergo, they piled up a massive debt of ₹4.3 lakh crore on their books by March 2015.
Alongside, constrained by their tight finances, the state discoms have been restricting their power purchases, resorting instead to load shedding. Data from NTPC, the largest power producer that generates a quarter of the country’s electricity, validates this point.
During 2015-16, NTPC produced 242 billion units of power, nearly the same as in the year before. This was preceded by a 3.4 per cent growth in power generation in 2014-15. As a result, while the company has been expanding capacity, since generation has been tepid for want of sufficient demand from the discoms, its plant utilisation levels have been falling.
To the rescue
Now, UDAY aims at correcting this poor state of affairs by helping the loss-making state discoms turn around financially, with support from their state governments. In return for the financial bailout, these utilities have to mend their old ways and become operationally efficient over the next few years.
Under the scheme, states will take over three-fourths of the debt of their respective discoms.
The state governments will then issue ‘UDAY bonds’ to banks and other financial institutions to raise money to pay off the lending banks. The remaining 25 per cent of the debt will be dealt with in one of two ways — it will either be funded by the money raised through bonds (backed by State guarantee) issued by the state discoms themselves or will continue as a bank loan but with a cap on interest rates.
How will this impact the discoms?
With a chunk of the debt taken off from their books, discoms will get substantial relief on the interest cost front, in turn freeing up cash flows. According to ICRA, assuming participation from all states (except Tamil Nadu, which has decided not to join), the debt takeover could take away an interest burden of ₹30,000 crore from the books of the discoms. For the banks, this will mean an opportunity to get back the money lent to the discoms, that may otherwise not have been recovered (or at least, not in time). This will, however, come with an interest rate cut.
So, far 18 states have agreed to or have already joined the scheme, participation in which is voluntary. But, there’s another side to it too — the debt takeover will push the debt levels of the state governments up — something that the proponents of the scheme don’t seem to be talking about too much.
No free lunch
In lieu for the financial relief, the discoms will have to achieve certain efficiency targets by 2018-19. They will have to scale down their AT&C losses to 15 per cent and ensure that their revenue from power sales fully recovers their costs. Currently, the discoms are selling power at tariffs below cost. These efficiencies are to be achieved by a combination of measures such as installing smart meters, GIS (geographic information system) tracking of loss-making areas, strengthening transmission infrastructure and regular tariff revisions, wherever required.
Apart from that, at a broader level, the scheme also has suggestions on reducing the overall cost of thermal power generation by ways such as coal swaps from inefficient to efficient power plants.
What’s in it for the States?
While the States now have an opportunity to reform their power distribution sector by joining UDAY, the Centre is also providing them incentives such as higher funding under its various schemes, additional coal supplies and access to cheap power from NTPC and other central government power generation utilities, to persuade them to do so. But, at the same time, to ensure that the states too have their skin in the game, UDAY requires them to partially fund the future losses, if any, of their discoms.
What it means for consumers
So, if the states can get the discoms to toe the line, does that mean brighter days lie ahead for consumers like you and me?
Today, many states have enough power generation capacity to meet the existing demand for power, but people still face power cuts because of reasons such as the discoms’ shaky financials. UDAY definitely brings hope that power supply to consumers can be stepped up. However, mending the discoms’ finances in many (though not all) states can come with tariff hikes.
So, while in the long-run you can benefit from more efficient power distribution, in the near-term, you may have to bear with higher tariffs. This may, however, not be true for all states that have signed up for the scheme. States such as Gujarat and Maharashtra, where the utilities are relatively efficient, could be some of these. In fact, the two states are participating in UDAY only to ensure that their discoms become even more efficient and they get to enjoy the incentives from the Centre. There will be no debt takeover by these state governments.