Home / News / India /  Why the lights dimmed on UDAY

NEW DELHI : When it was launched in 2016, the Ujjwal DISCOM Assurance Yojana (or UDAY) was hailed as a game-changer for India’s power sector. Yet despite the hype, India’s power sector remains a mess. Less than 50% of rural households receive more than 12 hours of electricity supply, according to a 2018 study. And state distribution companies or discoms --- responsible for delivering electricity to households --- are plagued with leakages, burdened with debt, and reeling under losses.

While financial losses of discoms have declined, they continue to incur huge losses. Indicative data from a Rajya Sabha reply shows that state electricity boards faced losses of around 27,250 crore as of 2018-19.

UDAY sought to instil financial discipline and restructure debt but the scheme has failed to tackle the underlying issues in the sector. Hindered by underpriced electricity, inadequate subsidy payments and long-term purchase agreements with generation companies, discoms continue to struggle in raising revenues.

At a time when Covid-19 threatens a global recession and bankruptcies are likely to mount, the failure of UDAY will only add to the stress on India’s public finances and financial system.

At the heart of India’s power sector malaise is the inability of discoms to deliver electricity efficiently. Leakages in transmission and non-recovery of billed amounts, which are broadly captured by discoms’ aggregate and technical losses (AT&C), have decreased over the years but at 20% remains well above the UDAY-mandated target of 15% by March 2019. While distribution losses have been declining gradually over the years, the implementation of UDAY does not seem to have made much difference in the rate of decline.

India’s inefficiency in power transmission continues to be among the highest in the world. Compared to other emerging economies, such as Brazil and China, India’s losses in distributing power are significantly higher.

Partly because of the leakages in distribution, discoms have struggled to break-even.

The only discoms that have reduced the gap between average revenue realized and average cost of supply (ARR-ACS gap) are Himachal Pradesh, Gujarat and Maharashtra. The high ARR-ACS gap in other states rings a warning bell of increasing operating losses.

These losses have important implications for the entire power supply chain. Payments from discoms to power generation companies are getting increasingly delayed which in turn is creating stressed assets.

These losses have important implications for the entire power supply chain. Payments from discoms to power generation companies are getting increasingly delayed which in turn is creating stressed assets.

Despite UDAY being a debt-restructuring scheme, debt-levels across discoms remain high (at 1.97 lakh crores) and this is constraining state finances. Discom debts form 3.8% of total liabilities across states and this will increase in the next two years as states are mandated to take over 25% and 50% of previous year’s discom losses. This will affect the nature of state spending. States that have taken on UDAY-debt have already cut back capital expenditure compared to non-UDAY states.

While UDAY’s focus was on discom debt, structural and infrastructure bottlenecks remain unaddressed. On the cost side, long term power purchase agreements with power generators does not allow discoms to revise prices. On the revenue side, discoms are constrained by the inability to change politically-sensitive electricity tariffs. Inadequate subsidy payments by states, electricity theft and unmetered electricity to the agriculture sector limit discom revenues.

By focusing on aggregate efficiency parameters rather than state wise targets, UDAY did not give enough attention to laggards, according to one study.

Ultimately, discoms will continue to remain in poor health till the time power pricing remains prone to political pulls and pressures. According to a recent study, across the developing world, attempts to expand access to electricity and mandating as a right has led to a spike in losses for the sector. And India has been no exception.

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