The sustainable solution

UDAY's success relies on genuine power tariff reforms

The Union government has launched a spirited defence of its Ujwal Discom Assurance Yojana (UDAY). The UDAY scheme was launched in November 2015, with the aim of relieving debt-ridden state-owned power distribution companies which, in the absence of economically viable tariffs, were making substantial losses. UDAY focussed on two key parameters. One, a financial turnaround. For this, it unveiled a plan for discom debts to be passed on to the states’ books so that discoms could enter into new power purchasing deals. Two, an improvement on the operational front in terms of reducing transmission losses and improved realisation of dues by using better metering and other measures. According to reports, power discoms are expected to save Rs 12,000 crore on interest payouts after 16 states joined UDAY for a total debt recast of over Rs 2 lakh crore. According to the power ministry, billing efficiency has increased by 2 per cent in 2016-17 across the country and the average aggregate technical and commercial losses have come down to 20.2 per cent. Moreover, the average gap between average cost of supply (ACS) and average revenue realised (ARR) has come down from 59 paise in 2015-16 to 45 paise in 2016-17 on account of reduced interest outgo, better tariff rationalisation and improved billing.

However, this is just one side of the story. The truth is that the only sustainable solution for the problem of the losses and debts that state-owned discoms face lies in timely tariff revisions. Unless discoms are able to make a transition to such a regime most of these gains would not count for much. Of course, debt recast and reductions in transmission losses are steps that would show overall improvement, but neither of them, in the absence of economically viable pricing, will ensure discom health. The financial restructuring of debt, which is the cornerstone of this scheme, can at best provide a one-off relief to discoms. On pricing reforms, however, a lot more has to be achieved. It is true that as many as 25 of the 27 states are shown to have effected tariff revisions in the last couple of years. But not all these revisions have reflected a spirit that would have required states to shun populism and increase tariffs across the board. Instead, evidence from many states suggests that some of them have chosen instead to make the industrial consumers pay extra in order to subsidise other consumer groups such as farmers. In many other cases, state-level electricity regulators have been tardy in reacting to proposals for tariff increases. The government recently criticised this “complacency” and “lack of boldness” on the part of such regulators, urging the regulators to “act independently and professionally” and even take “take suo motu actions to bring in reforms”.

This is not the first time that a financial restructuring scheme such as UDAY has been introduced to bail out discoms struggling to be viable. However, unlike in the past, this time the situation is more challenging because the mounting losses of discoms have coincided with increasing power generation capacity in the country. So the spurt in power generation happened as the buying capacity declined. Already private power projects worth 25,000 megawatt (Mw) are up for sale because companies are looking to reduce their debt burden. The lack of genuine pricing reforms among all states could further undermine the viability of another 60,000 Mw of power plants that are under construction.