UDAY no panacea for power sector woes
UDAY scheme’s efficacy is now being questioned with the stuck projects remaining sizeable and the threat of bad loans looming large
The belief that Ujwal Discom Assurance Yojana (UDAY) is an all-encompassing solution for power sector woes has now been shelved. As the recent central bank circular triggered fears of more bad loans tumbling out of banks, stakeholders are taking a closer look at the resolution process.
State Bank of India chairman has told CNBC-TV18 that the kind of improvement which was envisaged under UDAY has not taken place. Launched in 2015, UDAY is aimed at reviving electricity distribution companies (discoms), improving demand and, in the process, resolving the woes in the sector.
It took off well, with a large number of states joining the scheme. Several states took over the debt of their utilities, improving their liquidity situation, even as progress on other key parameters such as reduction in aggregate technical and commercial losses lagged. Anecdotal evidence also suggests an improvement in the power supply situation.
Still, with the stuck projects remaining sizeable and the threat of bad loans looming large, questions are now being raised about the efficacy of the UDAY scheme. With the benefit of hindsight and more data, analysts are realizing that UDAY’s ability to resolve the sector’s woes may well have been overestimated.
To be sure, UDAY can smoothen the power offtake distribution process. But it cannot drive demand beyond a certain point. In fact, electricity generation continues to track the long-term trends—generation till February this fiscal year (FY18) is up 4%, close to the 5%-plus growth seen in the decade from FY07 to FY17. Muted demand from the industrial segment, a large consumer segment, is said to be weighing on generation growth.
Also capping the demand outlook is limited requirement for long-term power purchase agreements (PPAs). At an event attended by Motilal Oswal Securities Ltd last year, four large power discoms indicated their existing PPAs are sufficient to meet demand growth for the next two-three years.
The second set of reasons emanate from capacities, both the quantum and the quality. Between FY10 and FY17, thermal generation capacity expanded at an annual average rate of 11.4% against an annual demand growth of less than 5%, according to Icra Ltd. This saddled the system with excess capacities. Meanwhile, the aggressively bid projects became financially unviable. Many lacked PPAs and fuel linkages. Cost overruns resulted in many of these troubled projects turning uncompetitive (in terms of tariffs). A study by Icra last year has shown that projects with aggregate capacity of 35,000 megawatts have seen capital cost escalation of about 40%.
Simply put, much of the NPA (non-performing asset) or bad loan resolution in the power sector is beyond UDAY. As pointed out earlier, the troubled projects would need government handholding. Reduction in project costs through haircuts to lenders and promoters, dedicated PPAs and supply of low-cost fuel can help salvage them.
“UDAY may not necessarily alleviate the likelihood of significant capacity becoming NPAs,” says Kuljit Singh, transactions partner (infrastructure) at EY. “To address the NPA issue, the discoms need to sign more of medium- and long-term PPAs, with a differentiated procurement strategy for base load and peak load. With the improvements on the coal side already imminent, firm offtake agreements will significantly help bring large parts of this ailing capacity back on track.”
Editor's Picks »
- At opposition meet, Rahul Gandhi targets govt over Rafale deal
- News in numbers: Trump’s attacks on the press ‘dangerous to the lifeblood of democracy’, says NYT
- Former Religare CEO Shachindra Nath raises about ₹1,000 crore for NBFC
- PE industry lobbies CCI for anti-trust exemptions
- Opinion | Turkey flashes warning sign to Asia
- Recent rise in trade deficit is not due to the oil prices
- Safeguard duty proposal has deepened uncertainty in the solar energy sector
- Fortis Healthcare: What now, after IHH entry and June quarter loss?
- Weak Q1 for Amara Raja but investors pin hopes on softening lead prices
- IDBI Bank Q1 results show how expensive it is for LIC