Power sector woes

Lack of actual reforms has undermined UDAY's promise

The Supreme Court on Tuesday will hear a case filed by the power producers’ association against the Reserve Bank of India's February 12 circular. The RBI’s notification mandated several power producers to go through the insolvency and bankruptcy process but the argument is that doing so would not only result in several creditors being forced to take steep haircuts but also in the destruction of massive power production capacities in the country. However, regardless of what the Supreme Court says tomorrow, this is a good time to look at the reasons why power producers have reached such a critical stage. The Union government has made “power for all” one of its main policy priorities and has launched several policy measures to ensure that consumers receive a steady supply of electricity and secure a predictable business model for the power producers. The main policy driver in this direction was the Ujwal Discom Assurance Yojana (UDAY), which was launched in November 2015. However, three years down the line, UDAY seems to have met with middling success at best.

The essential objective of UDAY was to restore the financial viability of public sector power distribution companies (or discoms). This was a timely intervention because, over time, thanks to the lack of pricing reforms — that is, ensuring power prices in the country stayed in line with the production and distribution costs — and high operational inefficiencies — for instance, high AT&C (aggregate technical and commercial) losses — discoms had come under severe financial burden. The level of debts was such that many discoms procured less than the required power from producers because for each additional unit that they distributed they picked up additional losses. In turn, this had an adverse impact on both consumers and power producers. Consumers, who have been admittedly paying far less for each unit of power than what is economically feasible, ended up getting punished with inadequate power supply. The producers, on the other hand, suffered as the demand for their produce dipped, completely disrupting their viability calculations.

Under UDAY, discom debts were to be taken on by the respective state governments, which were, in turn, expected to bring in reforms — both pricing and operational — and gradually restore order. But as a recent analysis by the National Institute of Public Finance and Policy has shown, UDAY created a significant pressure on state finances without really reducing discom losses or improving their operational efficiency. For instance, the UDAY portal data shows that the average AT&C losses, which should have been 15 per cent for all the participating states by 2018-19, at present stand at 25.41 per cent, on average. Indeed, for many states such as Uttar Pradesh, Bihar, Jammu & Kashmir, Madhya Pradesh, Chhattisgarh and Punjab, the AT&C losses are still increasing. Similarly, in the case of almost all the 22 states reporting data on DT (Distribution Transformation) metering and Smart Metering, the scores are far lower than the benchmark.

The story is the same for the financial indicators. For instance, the ACC-ARR Gap (the gap between average cost and average revenue) has also widened for many states. Clearly, if UDAY has to work, there is no alternative to ground-level reforms, both pricing and operational. Otherwise, power producers and consumers will continue to suffer.