Centre approves UDAY for financial turnaround and revival of DISCOMS

UDAY is a path breaking reform for realizing the Prime Minister's vision of affordable and accessible 24x7 power for all. It is another decisive step furthering the landmark strides made in the power sector over the past one and a half years, with the sector witnessing a series of historic improvements across the entire value chain, from fuel supply (highest coal production growth in over 2 decades), to generation (highest ever capacity addition), transmission (highest ever increase in transmission lines) and consumption (over 2.3 crore LED bulbs distributed).

The weakest link in the value chain is distribution, wherein DISCOMs in the country have accumulated losses of approximately Rs. 3.8 lakh crore and outstanding debt of approximately Rs. 4.3 lakh crore (as on March, 2015). Financially stressed DISCOMs are not able to supply adequate power at affordable rates, which hampers quality of life and overall economic growth and development. Efforts towards 100 percent village electrification, 24X7 power supply and clean energy cannot be achieved without performing DISCOMs. Power outages also adversely affect national priorities like 'Make in India' and 'Digital India'. In addition, default on bank loans by financially stressed DISCOMs has the potential to seriously impact the banking sector and the economy at large.

Due to legacy issues, DISCOMs are trapped in a vicious cycle with operational losses being funded by debt. Outstanding debt of DISCOMs has increased from about Rs. 2.4 lakh crore in 2011-12 to about Rs. 4.3 lakh crore in 2014-15, with interest rates upto14-15 percent.

UDAY assures the rise of vibrant and efficient DISCOMs through a permanent resolution of past as well as potential future issues of the sector. It empowers DISCOMs with the opportunity to break even in the next 2-3 years. This is through four initiatives (i) Improving operational efficiencies of DISCOMs; (ii) Reduction of cost of power; (iii) Reduction in interest cost of DISCOMs; (iv) Enforcing financial discipline on DISCOMs through alignment with State finances.

Operational efficiency improvements like compulsory smart metering, up-gradation of transformers, meters etc., energy efficiency measures like efficient LED bulbs, agricultural pumps, fans and air-conditioners etc. will reduce the average AT and C loss from around 22 percent to 15 percent and eliminate the gap between Average Revenue Realized (ARR) and Average Cost of Supply (ACS) by 2018-19.

Reduction in cost of power would be achieved through measures such as increased supply of cheaper domestic coal, coal linkage rationalization, liberal coal swaps from inefficient to efficient plants, coal price rationalization based on GCV (Gross Calorific Value), supply of washed and crushed coal, and faster completion of transmission lines. NTPC alone is expected to save Rs. 0.35 / unit through higher supply of domestic coal and rationalization / swapping of coal which will be passed on to DISCOMs / consumers.

Financial liabilities of DISCOMs are the contingent liabilities of the respective States and need to be recognized as such. Debt of DISCOMs is de facto borrowing of States which is not counted in de jure borrowing. However, credit rating agencies and multilateral agencies are conscious of this de facto debt in their appraisals. In line with the above and similar observations of Fourteenth Finance Commission, states shall take over 75 percent of DISCOM debt as on 30 September 2015 over two years - 50 percent of DISCOM debt shall be taken over in 2015-16 and 25 percent in 2016-17. This will reduce the interest cost on the debt taken over by the States to around 8-9 percent, from as high as 14-15 percent; thus improving overall efficiency.

Further provisions for spreading the financial burden on States over three years, will give States flexibility in managing the interest payment on the debt taken over, within their available fiscal space in the initial few years. A permanent resolution to the problem of DISCOM losses is achieved by States taking over and funding at least 50 percent of the future losses (if any) of DISCOMs in a graded manner.

UDAY is a shining example of the utilization of the best principles of cooperative and competitive federalism and has been evolved through discussions at the highest levels with multiple States. Adopting UDAY is optional for States, but provides the fastest, most efficient and financially most feasible way for providing 24X7 Power for All. It will be operationalised through a tri-partite agreement amongst the Ministry of Power, State Government and the DISCOM.