Topic- UDAY scheme for financial turnaround of Power Distribution Companies

UDAY: Reviving Power Discoms

In a bid to rescue almost bankrupt state electricity retailers, the Cabinet recently approved this scheme for reviving power utilities having debt amounting to Rs 4.3 lakh crore.

What is Ujjwal Discom Assurance Yojana?

UDAY provides for the financial turnaround and revival of Power Distribution companies (DISCOMs), and importantly also ensures a sustainable permanent solution to the problem. It has ambitious target of making all discoms profitable by 2018-19.

The scheme will ease the financial crunch faced by power distribution companies, that has impaired their ability to buy electricity.
<Power plants are operating at their lowest level of 59% of their capacity, due to this reason>

It is based on the premise that it is states’ responsibility to ensure that discoms become financially viable.

---

How UDAY will revive Discoms?

It has all the 3 elements —

1. Clear up the legacy issues of past losses and debt.
2. Provide a financial road map to bring tariffs in line with costs by FY19.
3. Provide enough deterrents for the state govt to not allow the state discoms to become loss ridden post FY18, as losses start to impact their FRBM limits.

• The State govt. will takeover the discom liabilities over 2-5 year period.
• This will allow discoms to convert their debt into State bond. These bonds will have a maturity period of 10-15 years.
• It will allow transfer of 75% outstanding debts incurred by stressed discoms to States’ debt, 50% in 2015-16 and 25% in 2016-17.
• The central government will not include the loans of the discoms in calculation of thestate’s deficit till 2016-17.

Why are these Discoms so stressed?

There are various reasons that lead to Discoms becoming unsustainable over the period of time.

1. Politics of free power, repressed tariffs and power thefts leading high transmission losses.
2. Poor infrastructure and low standard of management.
3. Power subsidies are given to all, irrespective of rich/poor.
4. Discoms in states of Rajasthan, Tamil Nadu and UP are the most stressed ones.
   <Rajasthan alone having a debt of Rs 85,000 crore, followed by Tamil Nadu at Rs 70,000 crore and UP at Rs 32,000 crore>

Almost 25% T&D ( Transmission & Distribution) losses suffered by discoms. Remaining 75% is sold at a price much lower than discoms’ procurement costs. Wondering Why??

The most obvious reason is political interference, i.e. tariff is set by a group of largely political appointees.

Financially stressed DISCOMs are not able to supply adequate power at affordable rates, which hampers quality of life and overall economic growth and development.

What will be the impact of this scheme?

• It is expected to help the banks in managing their bad loans.
• It will relieve discoms who can push power distribution in right way.
• It will allow states to align tariff costs, so that discoms run on a sustainable basis.

What are thrust areas of UDAY to turnaround discoms?

1. Improve operational efficiency.
2. Reduction in cost of power – By monitoring technical and commercial losses by smart metering and feeder separation.
3. Reduction in the interest cost of discoms.
4. Enforcing financial discipline on discoms through alignment with States’ finances.

What could be potential challenge to UDAY?

• Electricity is not a central subject, states’ cannot be made to participate in the programme.
• Finding buyers for such bonds might prove difficult, as these would enjoy the SLR status.
• It has not laid down a specific performance-monitoring and compliance mechanism.
• It does not cover inadequate investment in network & poor supply, which is essential for reliable and quality supply.
• No central monetary assistance is provided, rather states’ will be provided subsidised funding from the central govt.’s power schemes as well as priority in supply of coal.
  <Centre will be give additional central funding through Deendayal Upadhyaya Gram Jyoti Yojana, Integrated Power Development Scheme, Power System Development Fund, etc>

------------------------------------------------------------------------------------

Key News & Op-eds

March 19, 2016

RBI moves to boost bonds issued by states under UDAY

1. Context: State govts that have signed up for the UDAY scheme have started issuing bonds to banks
2. News: RBI has allowed banks to classify bonds issued by state govts as part of the UDAY scheme under held-to-maturity (HTM) category
3. Impact: The remaining discom loans would attract lower provisioning for banks now, as they would be classified as standard
4. Banks that have the highest exposure to discoms will benefit the most

Live Mint

March 3, 2016

Govt. nod for UDAY bonds

1. Context: Union govt.’s effort to revive ailing discoms through Ujjwal Discom Assurance Yojana
2. News: The Finance Ministry has approved the issuance of  UDAY bonds by 4 states
3. Mechanism: State govts can take over 75% of discom debt and pay back lenders by issuing bonds
4. The scheme provides for the remaining 25% of the debt to be paid back through discom-issued bonds
5. Challenge: Total discom debt in the country amounts to Rs.4.3 lakh crore

Read more about UDAY: Reviving Power Discoms

The Hindu

January 28, 2016

Rajasthan Govt. signs MoU to join UDAY

1. The Rajasthan Government and its power distribution companies or discoms signed a pact with the Centre.
2. Under the Ujwal Discom Assurance Yojana (UDAY) aimed at relieving the debt burden of the most indebted discoms in the country.
3. Rajasthan discoms have a total debt of Rs.80,500 crore which is 18.7 per cent of the country’s total discom debt of Rs.4.3 lakh crore.
4. This signing of the MoUs with Rajasthan is very significant because the state’s discoms have the largest debt.
5. Rajasthan was the first to come to meet us when we came to power to highlight this problem.

The Hindu

December 12, 2015

Response to UDAY scheme from States positive: Centre

1. Centre expects almost all States to join the UDAY scheme for revival of debt-laden power distribution companies by March 2016.
2. 9 states have already signed up, including AP, Jharkhand, Rajasthan, Punjab, J&K, Uttarakhand and HP.
3. The Union Cabinet may consider the amendments to the national tariff policy for electricity.
4. The policy is likely to help bring in efficiency in working of Discoms and boost revenues which will in turn help attract more investments in the sector.

The Hindu

November 10, 2015

UDAY lays thrust on 4 initiatives for financial turnaround of Discoms

1. Improving operational efficiencies of DISCOMs.
2. Reduction of cost of power.
3. Reduction in interest cost of DISCOMs.
4. Enforcing financial discipline on DISCOMs through alignment with State finances.

PIB

November 6, 2015

UDAY scheme for financial turnaround of Power Distribution Companies

Ujwal DISCOM Assurance Yojna (UDAY) for financial restructuring of debt of power distribution companies.

1. Scheme aims at financial turnaround and revival of Power Distribution companies (DISCOMs) and ensures a sustainable permanent solution.
2. Allows power DISCOMs in selected states to convert their debt into state bonds as well as roll out number of measures to improve efficiency at power plants.
3. It Improves operational efficiencies of DISCOMs, Reduce of cost of power,Reduce interest cost of DISCOMs, Enforce financial discipline on DISCOMs.
4. Improve operational efficiency by swapping of coal linkages, monitoring technical and commercial (AT&C) losses , smart metering and feeder separation in states.

With UDAY Scheme, Union Government seeks to accelerate the process of reform across the entire power sector in order to ensure affordable and accessible 24×7 Power for All.

PIB