Ray of hope for discoms

December 18, 2015 11:54 am0 commentsViews: 182

discomsHope the UDAY scheme leads to a real sunrise in discom operations and enables them to come out with improvements to meet the government’s dream of uninterrupted power for all, says JD Kulkarni.

The poor financial health of discoms has been one of the major reasons for the power sector’s woes; both for power producing companies as well as the banking industry. Most discoms are caught in a vicious circle of piling losses and mounting debts, leaving little money to buy power to meet demand. The discom losses have reached alarming proportions in states like Tamil Nadu, Rajasthan, Uttar Pradesh, Bihar and Jharkhand. The commercial losses are resulting in under recovery. Discoms are left with very little money to buy power or to carry out network maintenance. Blackouts due to lack of distribution network maintenance and load-shedding due to financial crunch and underrecovery has resulted in lower capacity utilisation of power plants and non recovery of bankers loans.

The banking sector as a whole has a huge exposure to the near bankrupt state-run discoms to the tune of Rs 4 lakh crore in principle alone and over Rs 5 lakh crore in interest and unpaid dues. Power plants are turning into non-performing assets. State discoms in Rajasthan, Uttar Pradesh, Tamil Nadu and Haryana are major loss-making entities while while many more are getting added to the list. The government had to take steps to help financially weak discoms to increase power off-take and benefit power producers so that the banking sector could also recover.

State-owned distribution companies in the country which are saddled with heavy debt, large scale distribution losses, frequent power theft, billing inefficiencies and mismanagement, have now been offered another incentive to improve their financial health.

This is the third time that the government has offered to pull them out of the crisis. The first bailout plan in 2002 was the issuance of long-term bonds to be discharged by state governments. The central generating companies were instructed to supply power to state discoms, strictly against letters of credit as financial security.

The second ambitious bailout plan announced in September 2012 turned out to be a non-starter. The state governments were to take over half the outstanding loans of state discoms till 31st March 2012 and convert these into bonds which would be issued to banks backed by state government guarantees. Balance 50 per cent loan was to be rescheduled to providing moratorium on principal and the terms. However, no financial improvement could be achieved by distribution companies due to a mismatch between their operational cost and the recovery approved by regulators through tariffs.

The Union Cabinet has now cleared another ambitious Rs 80 billion debt-recast and reform package to revive state utilities called Ujwal Discom Assurance Yojna (UDAY). The scheme aims for a financial turnaround of discoms by reducing their interest cost, improving operational efficiencies, reduction of cost of power and enforcing financial discipline through state finances. This is one of the most significant reforms undertaken by the central government to fix the finances of some of the most stressed discoms and create an enabling environment for a quick turnaround.

Further, under recovery of electricity bills by discoms was an issue. Neither the losses reduced nor the recovery improved. Independent power producers as well as state generators were feeling the heat due to low demand, resulting in lower capacity utilisation.

Now there is a ray of hope for discoms. The central government’s effort to improve the financial health of power distribution companies has once again taken shape, with the unveiling of a revival package. The Union Cabinet has now cleared another ambitious Rs 80 billion debt-recast and reform package to revive state utilities called Ujwal Discom Assurance Yojna (UDAY). The scheme aims for a financial turnaround of discoms by reducing their interest cost, improving operational efficiencies, reduction of cost of power and enforcing financial discipline through state finances. This is one of the most significant reforms undertaken by the central government to fix the finances of some of the most stressed discoms and create an enabling environment for a quick turnaround.

This will allow states to take over in a graded manner the debt of discoms, helping reduce their interest burden and allowing them to buy power to ensure uninterrupted supply. States have been given strong incentives such as cheaper power and more coal if they adopt the scheme. The state will have to take 75% of the outstanding debt of ailing distribution companies as on 30 September 2015. 50% of the debt is to be taken in the current fiscal year i.e. FY 16 and 25% in FY 17. In these two years, this debt will not be added in calculating state fiscal deficit. States will issue State Development bonds in the market or directly to the respective banks or financial Institutions holding the discom debt.

State-run Power Finance Corporation and Rural Electrification Corporation, which have large exposure to the discoms, will not be forced to buy the bonds to be issued by the respective states. The debt that is not taken over by the state shall be converted by banks and financial institutions into loans or bonds with interest rate not more than the bank’s base rate plus 0.1%. Alternately, this debt may be fully or partly issued by the discom as state guaranteed discom bonds at the prevailing market rates. The interest shall be equal to or less than bank base rate plus 0.1%. A tripartite agreement between the Union power ministry, state governments and discoms will be signed as part of the bailout plan.

Participation in the scheme is optional for the states. Problems in the sector are weighed down by freebies, cross subsidies, transmission and distribution (T&D) leakages and other regulatory issues. Unless these issues are addressed squarely, no scheme will succeed.

Unlike the debt recast plan of 2012, UDAY specifies strict budgetary constraints, provisions for monthly on-the-spot monitoring by Central teams and binding operational milestones for the state government and discom. It also provides incentives for performing states and penalties for nonperformers in the form of budgetary cuts. States participating in the scheme and performing as per operational milestones will be given additional funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such similar schemes. In case states are not able to meet milestones, the state will forfeit any claim to such funds. States will have to comply with Renewable Purchase Obligation from April 2012.

With the debt off their books and states issuing bonds, the interest burden of discoms is expected to come down to 8 to 9% as against 13 to 14% at present. As the scheme is optional, its timely implementation by state governments remains extremely critical for ensuring the credit quality. This is in the interest of not only the distribution companies but also for the generation industry by enabling the discoms to off take power as well as make timely payments.

The scheme can potentially reduce the discom losses of eight states that had participated in the financial restructuring package of Fiscal Responsibility and Budget Management by 2018. The conversion of discom loans into bonds is expected to get capital savings of about Rs 12,000 crore in the near term. The current plan approved by the Union cabinet has a better chance of succeeding than the two previous ones as it also aims to enforce financial discipline on the states.

The current plan approved by the Union cabinet has a better chance of succeeding than the two previous ones as it also aims to enforce financial discipline on the states.

The entire plan will fail without regular and large tariff hikes and reduction of ATC losses. With interest costs comprising 10-20% of the cost of power in states, all discom turnaround plans expect banks to reduce their profits from the loans disbursed. The reduction of rates on the remaining loans will hit the interest income for power focused lenders especially public sector banks as stated above. It could cost them about eight per cent reduction in their profit for next year. Complete rework of coal linkages to reduce the mine-topower- plant distance in order to reduce transport costs will also help reduce the cost of electricity. Allowing large producers like NTPC to move coal to thermally efficient plants would be of help in this direction for all states purchasing power from NTPC. The coal quality from Coal India and the difference between supply quality and billing was always questioned by all coal purchasers, including NTPC.

Now there is a proposal to get coal quality verified from an independent party. This would force Coal India to supply the grades they are charging for, which might reduce the cost of electricity. As Open Access in distribution picks up it would help in improving efficiency and reducing ATC losses. Power producers can benefit from improved demand and cash-flows, while T&D players will gain from higher demand, provided the states undertake measures in their true spirit.

The success of the discoms’ package UDAY is also 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 lakh crore to discoms and Prime Minister’s vision to supply affordable 24×7 power to all. Under the present Ujwal Bharat Yojna the government of India has integrated the approach of the three Ministries of Power, Coal and New and Renewable energy, to come together in realising the vision of 24×7 power to all.

The vision of 24×7 power constitutes of energy security, climate change, energy efficiency, smart cities and digital India under a single umbrella. In the long run, restructuring creates fiscal room for discoms to start buying power from the market as well as float bids for long term PPAs, which will be positive for power generating companies. Hope this UDAY scheme leads to a real sunrise in discom operations and enables them to come out with improvements to meet the government’s dream of uninterrupted power for all.

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