National Bytes: UDAY scheme seems unsuccessful

UDAY scheme seems unsuccessful

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In News:

  • Four years after it was launched, UDAY (Ujwal DISCOM Assurance Yojana)— the path breaking reform to revive electricity distribution companies (DISCOMS) — is falling apart.
  • The UDAY scheme now seems to be charting the same course as the earlier two unsuccessful attempts to set right the electricity distribution sector.
  • The scheme had some positives, though, of the 28 states that implemented it, 10 have shown either reduced losses or profits in FY19 (Financial Year-2019).

News Summary:

UDAY scheme seems unsuccessful
UDAY scheme seems unsuccessful

Mounting losses under UDAY:

  • According to data updated till September-end this year, book losses of DISCOMS, which had reduced from Rs 51,562 crore in FY16 to Rs 15,132 crore in FY18, have nearly doubled this financial year to Rs 28,036 crore.
  • According to a senior government official, the gap between the cost of power supply for DISCOMS and the bills they realize from consumers was pegged at close to Rs 1.5 lakh crore.
  • This was despite states providing support of close to Rs 85,000-90,000 crore to distribution utilities. The gap leads to further stresses and forces DISCOMS to default on payments.

ACS-ARR gap:

  • The data also points to DISCOMS lagging behind in eliminating the gap between the average cost of supply and realizable revenue (ACS-ARR gap).
  • As on December 17, only four states — Himachal Pradesh, Gujarat, Maharashtra and Karnataka — had recorded an ACS-ARR below 0, while the rest recorded gaps ranging from Rs 0.01/unit to Rs 2.13/unit.
  • A major reason for DISCOMS being unable to bridge this gap is delayed tariff hikes by states.

Missed AT&C loss target:

  • DISCOMS have also missed the FY19 UDAY target to bring down their aggregate technical and commercial (AT&C) losses to 15%.
  • Only around seven states had recorded losses of less than this amount.

Background:

What are DISCOMS?

  • The Indian power sector value chain can be broadly segmented into generation, transmission, and distribution sectors.
  • The distribution sector consists of Power Distribution Companies (DISCOMS) responsible for the supply and distribution of energy to the consumers (industry, commercial, agriculture, domestic etc.).
  • Power distribution companies collect payments from consumers against their energy supplies (purchased from generators) to provide necessary cash flows to the generation and transmission sectors to operate.
  • However, this sector is the weakest link in terms of financial and operational sustainability.

AT&C losses:

  • Transmission & Distribution losses do not capture losses on account of non-realization of payments.
  • Hence, the concept of Aggregate Technical & Commercial losses provides a realistic picture of loss situation in the context it is measured.
  • AT&C Loss is the actual measure of overall efficiency of the distribution business as it is a combination of energy loss (Technical loss + Theft + inefficiency in billing) and commercial loss (Default in payment + inefficiency in collection).

Schemes to bring down losses:

  • In 2001, the then union government had launched the APRDP (Accelerated Power Development and Reforms Programme) programme to bring down the AT&C losses of DISCOMS by providing them grants to upgrade their transmission infrastructure.
  • However, the DISCOMS were unable to subsequently use these grants due to several reasons.
  • In 2008, the central government restructured this scheme and relaunched it as R-APDRP (Restructured Accelerated Power Development and Reforms Programme).

Why has UDAY not succeeded as intended?

  • UDAY, like some other schemes, was planned to achieve certain targets in the short term by doing some financial engineering and providing some financial package. But, in order to sustain that improvement, efficiency gains have to be built in that system.
  • This means the AT&C losses need to go down, and billing and collection efficiencies should go up.
  • Hence, the primary reason for failure, is the failure of DISCOMS to collect the full cost that they pay for power — the same issue that had led to the floundering of the earlier schemes in the sector.

Impact on State Finances:

  • Given that the coupon rate on UDAY bonds are at a premium over those on SDL (state development loans) bonds, the cost of debt servicing has gone up for the UDAY states.
  • The impact on state finances is likely to continue much beyond the terminal year due to interest payment on UDAY bonds and redemption of these bonds — a grim prospect for most states combating a tight fiscal situation amid a continuing slowdown.
  • While the impact of UDAY on state finances from interest payments and redemptions is predictable, the impact of future losses is uncertain, as it is dependent upon the realized financial performance of DISCOMS.
  • The subpar performance of the scheme now deepens that uncertainty.

New Scheme in the pipeline to replace UDAY:

  • A new scheme is now being readied as a replacement for UDAY.
  • The broad idea in the revised scheme is that, DISCOMS can only remain in the public sector if they get to a situation where their deficit is under control. Otherwise, states will be asked to implement different models involving the private sector, like the franchise or PPP models.
  • The Centre is also likely to back up the new scheme by providing some grant support, which it did not do in UDAY.

About: UDAY Scheme

  • UDAY scheme was launched in November 2015, under which state governments took over 75% of the debt of their DISCOMS, issuing lower-interest bonds to service the rest of the debt.
  • In return, DISCOMS were given target dates (2017-19) to meet efficiency parameters like reduction in power lost through transmission, theft and faulty metering.
  • The scheme’s objectives are financial turnaround, operational improvement, development of renewable energy, reducing the cost of generating power and energy efficiency and conservation.
  • The Ministry of Power has maintained that UDAY was different from the earlier attempts as it factored in interventions in coal, generation and transmission sectors as well, instead of just focusing on distribution.
  • However, the rebound in DISCOM losses in FY19 alongside the increase in DISCOM dues to generators, has prompted the possibility of a recast of the scheme.

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