UDAY scheme is a significant positive for the power sector

December 23, 2015 3:01 am0 commentsViews: 347

girish_kadamStates Girish Kadam, VP, Corporate Sector Ratings, ICRA Limited, in an interaction with Monica Chaturvedi Charna…

Will government schemes like the recently announced UDAY initiative suffice in pulling utilities out of the quagmire? What are the key focus points of the scheme?

The Government of India approved a scheme called Ujwal Discom Assurance Yojana (UDAY) on 5 November 2015 with an objective of financial turnaround of state-owned distribution companies through four key initiatives a) Reduction in interest cost of discoms principally through a phased takeover of discom debt by state governments; b) Improving operational efficiencies of discoms;c) Reduction in cost of power purchase and d) Enforcing financial discipline on discoms through an alignment with state finances.  The UDAY scheme envisages a significant state government support mainly in the form of taking over of 75% of discom debt (50% in H2 FY2016 and 25% in FY 2017) by the respective state governments, reduction in interest rate for the balance 25% of discom debt which may be issued in the form of discom bonds backed by state government guarantees. The scheme also envisages states taking over future losses of discoms from FY 2017 onwards in a graded manner. The UDAY scheme is a significant positive for the power sector.

ICRA estimates that if the scheme is implemented, the aggregate relief to discoms is likely to be around Rs 880 billion per year by FY 2019, which translates into a reduction in losses by  around Rs 0.95/unit on an all India basis, although the per unit impact on the most affected states namely Uttar Pradesh, Tamil Nadu, Rajasthan and Haryana are likely to be significantly higher. This in turn, should enable distribution utilities to breakeven over the next 3-4 year period. The aggregate relief of Rs 880 billion per year by FY 2019 estimated comprises a) Saving in interest cost by Rs 460 billion due to debt takeover (for 75% of debt) and interest relief for the balance, b) Reduction in the cost of power purchase by Rs 160 billion with likely sustained improvement in availability of domestic coal and c) Saving in cost of supply by Rs 260 billion, assuming improvement in AT&C losses by 400 bps.

What are the determining factors for the success of this scheme?

As the scheme is optional for states, timely implementation of the same by state governments remains extremely critical for ensuring the credit quality of not only distribution companies, but also for generation entities by enabling the discoms to off-take power as well as make timely payments. Apart from the takeover of debt, the turnaround of discoms would necessitate a) Continued focus by utilities to improve the distribution loss levels and keep cost structures and loss levels in line with  regulatory targets for tariff setting; b) Adequate and timely tariff revision by SERCs including periodic pass-through of fuel and power purchase cost fluctuations and c) Timely and adequate subsidy releases by state governments.

The UDAY scheme envisages a significant state government support mainly in the form of taking over of 75% of discom debt (50% in H2 FY2016 and 25% in FY 2017) by the respective state governments, reduction in interest rate for the balance 25% of discom debt which may be issued in the form of discom bonds backed by state government guarantees. The scheme also envisages states taking over future losses of discoms from FY 2017 onwards in a graded manner.

Kindly shed light on the government’s Amnesty scheme and how does it help in settling disputed electricity bills. How much have private utilities like BSES and TPDDL benefited from this scheme?

The Delhi government introduced the Amnesty scheme on 30 August 2015 with the main objective to provide a one-time settlement related to disputed electricity bills. The scheme provides an opportunity to settle several categories of electricity disputes related to a) Direct theft, b) Meter tampering, c) Misuse/unauthorised use of electricity, d) Permanently disconnected consumers and e) Scheme for JJ Clusters. This scheme has been subsequently extended twice and is now valid till 31 December 2015. It comprises a waiver of late payment surcharge, partial waiver of outstanding amount and an option for payment of the balance over a 6 month period amongst other things. Such a scheme would mainly benefit consumers with regularisation of their connections and permanent resolution related to disputed bills, while utilities would be able to recover such disputed amounts relatively faster, and will also relieve their working capital requirements to a great extent. Based on industry sources, about 43,000 (approximately) cases were settled under this scheme in a 2 month period till October 2015 by the Delhi discoms.

Enumerate the key smart grid technologies that have recently been adopted by the distribution
sector to ensure smooth power supply and to curb power theft, tampering, etc.

Smart grid technologies essentially comprise advanced metering, communication and IT infrastructure so as to capture real time data on demand /consumption pattern, so that electricity supply can be more efficient, reliable and secure. Smart grid initiative has been a focus area of the Ministry of Power, which has allotted pilot projects across distribution utilities in 14 cities. Fifty per cent of the funding comes in the form of grants by the government.

The focus is also to bring out sustainable improvement in the AT&C loss levels to 15 per cent, from the currently high level (at about 24 per cent). The most recent smart grid technologies adopted by private distribution utilities in Delhi include commissioning of a smart grid project in May 2015 which involves an automated demand  response (ADR) power distribution project for commercial and industrial facilities. This allows the utility to manage electricity supply in peak demand conditions as well as in any other grid emergency situation. Going forward, with a serious need to curtail distribution losses, more such capex on IT and smart grid initiatives is likely to happen by discoms in various states. Given the fact that such capex schemes are also eligible for schemes such as Integrated Power Development Scheme (covered for urban areas as well by all discoms including private owned) where maximum 75 per cent of the scheme cost funding is available through Central Government grant.

Electricity distribution is the most critical link in the electricity market catering directly to the end consumers and with the revenue flow of the sector originating here. However,electricity distribution remains the weakest link in the Indian power sector, driven in part by inadequate tariffs in relationto the cost of supply, higher than allowed distribution loss levels for utilities in many states and inadequate and untimely subsidy release by state governments in a few states.

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