UDAY: Ujjaval Discom Assurance Yojana

By | November 24, 2015

The Union Government has recently launched UDAY: Ujjaval Discom Approval Yojana, to reform the ailing Indian power sector.

UDAY

  • India’s power sector is facing many problems
  • State discoms are in severe debts, amounting to more than 2% of the GDP. They are one of the major reasons for rising bank NPAs. Their operational losses are being funded by debt
  • India currently has an installed capacity of power enough for a 24*7 supply to all homes. But due to these inefficient discoms, the power is unable to reach the consumer
Problems with India’s T&D systems:
  • One of the highest net losses in the world in transmission at around 23%
  • Outdated technologies are used. Absence of smart grid
  • No strategic power purchase agreements are signed in advance
  • Tariffs are not market linked. Political interference in deciding tariffs
  • Subsidized and free power for political reasons
  • Power theft and faulty metering
  • Outdated and power consuming transformers
Problems with earlier schemes
  • No mechanism existed for excessive borrowings, sending the discoms into huge losses
What UDAY involves
  • An ambitious target of making all discoms profitable by 2018-19
  • Takeover of Discom liabilities by the state governments over a two to five year period. This debt would not be reflected under states’ fiscal deficit targets
  • Debt to be financed via bonds with a maturity period of 10-15 years
  • 3-4 percentage points reduction in interest rates on bonds
  • Future losses to be financed only via Discom bonds guaranteed by state governments. Working capital loans should not exceed 25% of previous years’ revenue
Where UDAY lacks
  • It has not laid down a specific performance monitoring and compliance mechanism
  • Monitoring reliable and quality power supply is absent in UDAY. It is essential to get out of the vicious cycle of low revenue recovery, inadequate investments in networks and poor power supply.
  • There are no monetary benefits being given to the states to follow the scheme. Only preferential allotment of coal and other resources would not lure the states into abiding by UDAY
Problems which will be faced
  • Significant tariff increases to eliminate revenue gaps would be difficult political decisions
  • Reduction in power subsidies would disenchant the electorate
  • Rapid penetration of distributed solar generation can pose significant financial losses
  • Electricity is a state subject.
  • Finding buyers for the bonds issued by state governments would be difficult as they wont be categorized under SLR criteria
Other solutions:
  • Regulators must be kept at arms length from governments. For this, Electricty Act’ 2003 must be amended.
Benefits:
  • Reliable and efficient power supply
  • Reduction in bank NPAs
  • Investments in T&D

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