UDAY (Ujwal DISCOM Assurance Yojana) scheme

In November 2015, the Government had launched UDAY (Ujwal DISCOM Assurance Yojana) scheme to provide a permanent solution for financial turnaround and revival of Power Distribution companies (discoms).

Overview of Discom Problems

As on March 2015, the accumulated losses and the outstanding debt of discoms are approximately Rs. 3.8 lakh crore and Rs. 4.3 lakh crore, respectively. In spite of having over 270 gigawatts of power generation capacity, we are using only half of it mainly because of inefficiencies in distribution. The main reasons for the accumulated losses and debts of discoms are – AT&C losses; high price of bulk power due to high delivery cost of coal; interest cost on accumulated debt; low investment in distribution; poor metering, inefficiency in billing and collection; lower tariffs and politics of free power. The two previous attempts to bail out the discoms are failed because of no follow up mechanisms and state government’s unwillingness for tariff rationalisation.

The problem of AT&C Losses

Aggregate technical and commercial (AT&C) losses have been the major problems of power discoms (distribution companies) in India. These problems are due to power theft, leakage in transmission, non-billing or incorrect billing, inefficiency in collection of payments etc. The consequences of these are as follows:

  • High losses have put the discoms in a state of continuously poor financial health.
  • State discoms have heavily borrowed from the banks and due to their inability to pay off the debts, banks are under stress causes by NPAs.
  • Due to political pressure and agricultural lobbies in states, the discoms are unable to revise tariff enough to cover their losses.

In 2001, the NDA government had launched the APRDP 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 use those grants due to several reasons. In 2008, the UPA government restructured this scheme and launched it as R-APDRP.  Funds were set aside for states to improve the transmission infrastructure. Despite of so much hype and hoopla, the scheme did not work well.

Efforts under Current Government

Current Union Government had launched three schemes in the power sector viz. IPDS, DDUGJY and UDAY.

  • IPDS (Integrated Power Development Scheme) is basically a new avatar of R-APDRP scheme in which funds are provided for reduction of AT&C losses, upgradation of infrastructure, IT based billing and auditing system and collection efficiency. Under this scheme, all discoms including private ones are eligible to get government support. Power Finance Corporation is nodal agency for this scheme.
  • DDUGJY Deendayal Upadhyaya Gram Jyoti Yojana (DUGJY) focuses on feeder separation for rural households and agricultural purpose. The idea is that if household lines and agricultural lines are separated, it’s possible to provide 24 hours electricity in villages. This is a huge scheme with total budgetary outlay of Rs. 76000 crore of which Rs. 63000 crore is grant from Union Government.
  • Another major scheme is UDAY (Ujwal Discom Assurance Yojana) which is basically a debt restructuring plan for discoms. This is a novel scheme and has potential to change the fate of power sector in India.

Key Proposals under UDAY scheme

UDAY is basically a scheme of financial turnaround of state owned distribution companies. This objective is mainly to be achieved via phased takeover of the debts of the discoms by state governments. The states which join this scheme (this implies that scheme is optional for states) would sign an MoU and will take over the 75% of Discom debts as follows:

  • 50% in Financial Year 2016
  • 25% in Financial Year 2017

Once the state government has taken over this debt, it would issue bonds backed by state government guarantee. The outcome of this would be saving on interest. How? Currently Discom debts are on a much higher interest rates (14-15%) borrowed from banks. If the state government takes over these debts, they would pay lesser interest (8-9%) to the state governments. However, states might face financial crunch due to this debt take over. This issue is to be solved by two means:

  • States will issue bonds with coupon rates {coupon rate means interest rate} at around 3% less than the average existing interest rate.
  • These loans taken over by the states will NOT be counted in the fiscal calculations of the state {so that it does not affect their fiscal standing in terms of finance commission recommendations}.

Thus, this will mainly benefit both the discoms as well as the state in the form of savings in interest rates.

Side by side, the scheme would incentivise the states for improving the operational efficiencies also by two means:

  • Reduction in cost of power purchase
  • Enforcing financial discipline on Discoms through alignment with state finances

The target is to reduce the average AT&C loss from around 22% to 15% and eliminate the gap between average revenue realized & average cost of supply by 2018-19. It will be achieved by improving operation efficiency through compulsory smart metering, upgradation of transformers, meters etc. and energy efficiency measures like efficient LED bulbs, agricultural pumps, fans & air-conditioners etc.

Reduction in cost of power

It would be achieved by increased supply of cheaper domestic coal, coal linkage rationalization, liberal coal swaps from inefficient to efficient plants, coal price rationalization based on Gross Calorific Value, supply of washed and crushed coal, and faster completion of transmission lines.

Enforcing financial discipline on discoms through alignment with State finances

The balance 25% of discom debt may be issued in the form of discom bonds backed by state government guarantees. States also shall take over and fund at least 50% of the future losses (if any) of discoms in a graded manner.

Other Notable Points for the scheme

UDAY is optional for all States. States accepting UDAY and performing as per operational milestones will be given additional / priority funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such schemes of Ministry of Power and Ministry of New and Renewable Energy.

States failing to meet the operational milestones will be liable to forfeit their claim on IPDS and DDUGJY grants. Government of India will not include the loans of discoms taken over by the state governments in calculation of the state’s deficit till 2016-17.

How Uday Scheme is different from previous capital infusion efforts?

Unlike the previous two attempts which had focused largely on capital infusion into discoms, UDAY seeks financial turnaround and revival of discoms. UDAY attempts to shift the debt burden of discoms to state governments. Now states have to directly bear the entire cost of the subsidies on their budgets. UDAY is a comprehensive scheme as it provides measures for both cost-side efficiency and revenue-side efficiency. For cost-side efficiency, the scheme focuses on reduction of interest burden, reduction in fuel cost through coal swapping, coal price rationalization, time-bound loss reduction, etc. On revenue side, it proposes a strict discipline of quarterly fuel cost adjustment, annual tariff increase, etc. By providing incentives for performing states, the scheme attracts the states participation. As the scheme is optional for state governments, its success depends on acceptance and timely implementation form the states. Discoms on their part have work on improving their operation efficiency. Regular tariff rationalisation and timely release of subsidies by state governments will improve the financials of discoms.

The success of UDAY is critical for India’s ambitious clean energy programme to combat climate change, revival of stranded thermal projects, the health of banks that have lent Rs 4.3 lakh crore to discoms and the government’s vision of supplying affordable and accessible ‘24×7 power to all.’