The fourth edition of Spotlight assesses the flagship scheme of Government of India to revamp the electricity sector in the country, the Ujjwal Discom Assurance Yojana (UDAY) scheme.
Electricity Distribution Sector in India: Has UDAY helped in India Shining?
Ujjwal Discom Assurance Yojana, popularly known as the UDAY scheme, was launched after subsuming a plethora of schemes catering to the Indian power sector. This sector, traditionally controlled directly by the state, has been privatised and subsequently regulated through laws, such as the Electricity Act of 2003. One common attribute that has not changed even after decades of reforms is the poor financial and operational performances of many state-owned distribution companies (discoms). The state has been using a ‘carrot and stick’ approach in financial schemes and packages, such as Accelerated Power Development and Reforms Programme (APDRP), the R-APDRP, the FRP (Financial Restructuring Package) and, in 2015, the UDAY scheme.
This spotlight tackles and analyses the performance of the Indian power sector after almost five years of the launch of UDAY scheme. It first sheds light on the policy objective envisaged by the government for UDAY and subsequently its report card over multiple parameters. It also highlights some ‘good practices’ from other states which have been relatively better performing than many others.
The Vicious Cycle of Inefficiency
The policy objective of UDAY scheme was to break the above-depicted vicious cycle, by cleaning the discoms’ books. This would have ideally enabled them to invest more in strengthening the distribution and transmission network which, in-turn, would have enhanced the operational and the financial health of these utilities.
How to achieve the objective?
The state governments have to take care of the huge debts, in return of which, the discoms have to meet the operational targets. Once a MoU is signed with respective state government, 3/4th of the debt of the discom is taken up by the state to issue UDAY bonds for banks and other financial institutions. The remaining is also converted into low-interest loans or funded by the money raised through bonds. In return, discoms were to enhance operational efficiency by meeting targets of 10 indicators specified in the scheme document.
Approach adopted by policymakers?
Performance-linked financial incentives were to be awarded to discoms upon meeting the pre-decided performance parameters. These incentives were to be given in the form of grants, low-interest loans and subsidies.
Bottomline: Finance was only to be given to discoms if they achieve the targets of operational efficiency set by the government.
How UDAY fared?
Many states have performed well in achieving the targets under UDAY. But the national level picture is worrisome. The main pretext of the scheme was clearing the books of discoms to allow them to invest more on efficiency, which would result in financial soundness as well. But a recent report released by CRISIL points towards the rising debt levels to pre-UDAY levels in 2019. This situation, which they refer to as the ‘red steak’, is represented in the graph below:
|Indicator||Target Level||Achieved Level|
|Aggregate Technical and Commercial Losses (AT&C)||15%||24.55%|
|ACS-ARR Gap (Cost of supply-Revenue Requirement)||Rs 0/unit||Rs0.37/unit|
|Bonds Issued||Rs 269056.35 crore||Rs 232163 crore (86.39%)|
|Indicator||Target Level||Achieved Level|
|Feeder Metering (Urban)||42168||48178 (Above 100%)|
|Feeder Metering (Rural)||98354||116184 (Above 100%)|
|Distribution Transformer Metering (Urban)||130094||1093917 (84%)|
|Distribution Transformer Metering (Rural)||4413176||2664221 (60%)|
|Household Electrification||2054.03 lakhs||1954.04 lakhs (95%)|
|Smart Metering (Above 500kWh)||5733307
|Smart Metering (Between 200 and 500kWh)||18429956||680938 (4%)|
|Feeder Segregation||62902||48580 (77%)|
|Rural Feeder Audit||97866||413512 (Above 100%)|
- Although, there are certain parameters where e targets have been achieved at the national level, but the rising levels of discom debt, still high distribution losses and a net revenue gap in sale of electricity across the country are a pressing concern.
- On AT&C Losses: Being a responsibility of the distribution utility, there is a state-to-state variation in the levels of losses across India. Some states have very low levels, like Gujarat, Uttarakhand (eight percent) while it goes up to 50 percent in Jammu and Kashmir. Reasons are also different for such high degree of variation. Political will and strong governance systems are a pre-lude to meeting any policy objective, including AT&C loss reduction. Geography, sometimes plays its parts, with collection of bills becoming challenging in difficult terrains. Technically advanced transmission and distribution (T&D) systems and solutions can contribute significantly to a positive reduction in losses.
- On ACS-ARR Gap: A positive gap resembles a net revenue gap for selling one unit of electricity by discoms. Many states have achieved negative gap (net revenue surplus) while others are operating at a net loss. A major reason for this is higher costs (of power purchase, operations, interests, carrying costs, etc.) and also poor operational efficiency.
- On Tariff Revisions: Regular and reasonable returns for a utility are a key to its financial success. In case of electricity discoms in India, political promises of tariff waivers hamper the economics of distribution business. Regular tariff revisions as per Multi Year Tariff (MYT) rules should be adhered to, in order to save discoms from becoming yet another Non-Performing Asset (NPA).
- On Feeder Metering: Unmetered and agricultural connections contribute to the uncertainty of data surrounding efficiency of utilities. Flat rate tariff systems and reports of misreporting agricultural sales as theft have a bearing on the actual books of discoms. Only complete feeder metering and DT metering and continuous monitoring and audits can provide with a sound system of reliable data.
- UDAY scheme’s inability to clean up discoms’ books highlight the need of thinking beyond providing financial packages. Instead, structural changes are the need of the hour.
Way Forward: Good Practices
Food for thought..!
- Such vicious cycles are evident in many sectors and interventions now (loss making public sector undertakings, integration of electric vehicles, adoption of solar technology), the classic chicken-egg problem. Is there a common strategy to tackle such problems?
With bailout packages not yielding the desired results, what innovative solutions can be used to achieve the objectives of operational and financial efficiency of loss-making public utilities?