UDAY stretches state deficits with limited success

The UDAY scheme has helped some discoms improve but most others have missed the mark

Apr 20, 2018 12:04 IST India Infoline News Service

The Ujwal Discom Assurance Yojana (UDAY) scheme was announced in November 2015 with the aim to turn Power Distribution Companies (Discoms) profitable by the end of FY19. The scheme aimed to do this by measures such as - (1) gradual takeover of Discom losses by the state government, and (2) improving operational efficiencies. The eventual aim would be to reduce AT&C loss to less than 15% as well as reduce the ACS-ARR gap to zero by the end of FY19.

Few hits, many misses
UDAY has helped reduce Discom losses from Rs51,589cr in FY16 to Rs35,683cr in FY17 (a reduction of Rs15,906cr). There has also been a significant reduction in the ACS-ARR gap from 60 paise in FY16 to 43 paise in FY17. UDAY has also helped in reducing the interest burden of Discoms by Rs15,000cr till March 2017.

However, this momentum has not sustained in FY18. Most states have missed operational targets set under the UDAY scheme. Out of the 31 states who are participating in UDAY, only six states and one Union Territory had met their targets for FY17. Gujarat, Himachal Pradesh, Karnataka, Tripura, Uttarakhand and Dadra & Nagar Haveli were the only states able to meet their AT&C loss targets. Out of all UDAY states, 13 states have actually reported higher AT&C losses compared to last year. The biggest misses in target for AT&C losses have been seen in the states of J&K, Rajasthan, Punjab, UP, MP, Jharkhand, Puducherry and Goa.

Successes AT&C loss target Latest AT&C loss
Gujarat 13.88 11.88
Himachal Pradesh 13 6.1
Karnataka 15.42 15.28
Tripura 25 18.62
Uttarakhand 27.92 25.02
Dadra & Nagar Haveli 7.5 7.23
Misses AT&C loss target Latest AT&C loss
Jammu & Kashmir 35 57.4
Rajasthan 18.42 24.44
Punjab 14.5 30.91
UP 24.7 30.94
MP 18.22 31.63
Jharkhand 24.99 36.28
Puducherry 14.86 21.52
Goa 5.12 17.04
The crucial first step of the UDAY scheme was to improve the solvency of Discoms by arranging for the various state governments to take over the losses of the Discoms. However, in order to sustain the self-sufficiency of the Discoms after the state financing, operational reforms would be crucial. This is why targets for ACS-ARR and AT&C losses were set under the UDAY scheme.
State governments- a key component of UDAY
In 2008 as well as in 2012 the then UPA government had attempted to bailout the Discoms via settlements from the state governments. However, the bailouts had failed both those previous times as well due to lack of operational improvement by the Discoms.

A part of the UDAY scheme is the takeover of Discom losses over FY17-20 by the respective state governments. These losses would finances via bonds issued by the respective state governments. While this has resulted in some Discoms reporting lower losses, lack of operational improvements and delays in disbursal of subsidies have undermined the progress of UDAY. An additional concern, is that those states with big misses in AT&C targets (Rajasthan and UP in particular) are also those states running large fiscal deficits.

FY17 Fiscal Deficit (Rs cr) As % of GSDP
Jammu & Kashmir 6,197 4.9
Rajasthan 46,318 6.12
Punjab 52,839 12.18
UP 55,989 4.49
MP 27,664 4.3
Jharkhand 10,106 3.99
GSDP – Gross state Domestic Product
Power generation companies to face issues
The PLF of the power generation sector (non-renewables) stood at 62.8% for the month of February against 60% for 11MFY18. This was due to improved offtake from Discoms due to the benefits of the UDAY scheme. The improvement in Discom offtake is crucial to sustain growth in power generation. At present, there are 34 power projects (~40GW of capacity) that have been classified as “stressed”. These projects have an outstanding debt of 1.7 lakh cr. A large reason behind the stress in the power generation segment is due to their inability to secure PPAs with Discoms.
A large part of the additional offtake of power in FY18 has been through the short term power market. However, in order for generation companies to remain financially secure, it is crucial that they tie up capacity through PPAs with Discoms. At present, Discoms are unwilling to commit to long term PPAs due to their lack of lack of solvency. Of the 40GW of stressed assets, ~25GW do not have any PPA. Thus, if UDAY fails to address the operational performance of state Discoms, we would see additional stress build up in the power generation segment.
While UDAY has been a success in some states, for 12 states operating parameters have degraded. The DT metering of the distribution network, which was expected to be completed by June 2017, is at 50% completion for rural areas and 57% completion for urban areas. Deployment of Smart Meters has been an especially disappointing miss. Smart meters were supposed to help distributors manage real time gathering of information regarding demand and supply as well as prevent AT&C losses. However, Smart Meters have seen slow adoption as technology constraints have prevented a mass rollout. Thus, while UDAY had started off with much promise, 2 years on the scheme has failed to hit its most of the targets set till date.

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