UDAY no panacea for power sector woes
Why in news
The belief that Ujwal Discom Assurance Yojana (UDAY) is an all-encompassing solution for power sector woes has now been shelved. As the recent central bank circular triggered fears of more bad loans tumbling out of banks, stakeholders are taking a closer look at the resolution process.
- State Bank of India chairman has told CNBC-TV18 that the kind of improvement which was envisaged under UDAY has not taken place. Launched in 2015, UDAY is aimed at reviving electricity distribution companies (discoms), improving demand and, in the process, resolving the woes in the sector.
- It took off well, with a large number of states joining the scheme. Several states took over the debt of their utilities, improving their liquidity situation, even as progress on other key parameters such as reduction in aggregate technical and commercial losses lagged. Anecdotal evidence also suggests an improvement in the power supply situation.
- Still, with the stuck projects remaining sizeable and the threat of bad loans looming large, questions are now being raised about the efficacy of the UDAY scheme. With the benefit of hindsight and more data, analysts are realizing that UDAY’s ability to resolve the sector’s woes may well have been overestimated.
- To be sure, UDAY can smoothen the power offtake distribution process. But it cannot drive demand beyond a certain point. In fact, electricity generation continues to track the long-term trends—generation till February this fiscal year (FY18) is up 4%, close to the 5%-plus growth seen in the decade from FY07 to FY17. Muted demand from the industrial segment, a large consumer segment, is said to be weighing on generation growth.
- Also capping the demand outlook is limited requirement for long-term power purchase agreements (PPAs). At an event attended by Motilal Oswal Securities Ltd last year, four large power discoms indicated their existing PPAs are sufficient to meet demand growth for the next two-three years.
- The second set of reasons emanate from capacities, both the quantum and the quality. Between FY10 and FY17, thermal generation capacity expanded at an annual average rate of 11.4% against an annual demand growth of less than 5%, according to Icra Ltd. This saddled the system with excess capacities. Meanwhile, the aggressively bid projects became financially unviable. Many lacked PPAs and fuel linkages. Cost overruns resulted in many of these troubled projects turning uncompetitive (in terms of tariffs). A study by Icra last year has shown that projects with aggregate capacity of 35,000 megawatts have seen capital cost escalation of about 40%.
- Simply put, much of the NPA (non-performing asset) or bad loan resolution in the power sector is beyond UDAY. As pointed out earlier, the troubled projects would need government handholding. Reduction in project costs through haircuts to lenders and promoters, dedicated PPAs and supply of low-cost fuel can help salvage them.
- “UDAY may not necessarily alleviate the likelihood of significant capacity becoming NPAs,” says Kuljit Singh, transactions partner (infrastructure) at EY. “To address the NPA issue, the discoms need to sign more of medium- and long-term PPAs, with a differentiated procurement strategy for base load and peak load. With the improvements on the coal side already imminent, firm off take agreements will significantly help bring large parts of this ailing capacity back on track.”
All you wanted to know about UDAY
- UDAY, which means sunrise, is the Centre’s scheme to rescue the country’s ailing state power distribution utilities (discoms). And it is supposed to be nothing short of a new dawn for them — the books of the State discoms are to be purged of their massive losses and mounting debt, paving the way for them to be operationally viable.
- UDAY or Ujwal Discom Assurance Yojna was launched in November 2015 to help loss-making discoms turn around financially, with support from their State governments. But before we go into details, here’s some background. For many decades, State discoms have been supplying electricity at tariffs that are far below cost. For obvious political reasons, States have been wary of revising power tariffs in line with rising costs. Inefficiencies in power distribution such as large transmission and distribution losses on power, have further strained the finances of the discoms, who have been borrowing heavily from banks to keep themselves running. Ergo, the loss-making discoms have piled up a massive load of debt on their books; it totalled ₹4.8 trillion in September 2015.
- UDAY aims at reforming the power sector. The discoms’ poor finances are constraining their electricity purchases, which in turn is forcing generation companies to idle their plants. Reliable, reasonably priced and sustainable power supply is critical for economic growth. The power sector’s debt woes have also exposed the banking sector to risks. With this debt now being taken over by the States, banks can be assured of timely repayment.
- Under the scheme, States will take over three-fourths of the debt of their respective discoms. The governments will then issue ‘UDAY bonds’ to banks and other financial institutions to raise money to pay off the banks. The remaining 25 per cent of the discom debt will be dealt within one of the two ways — conversion into lower interest rate loans by the lending banks or be funded by money raised through discom bonds backed by State guarantee. Backing from the State will help bring down the interest rate for the discoms.
- In return for the bailout, the discoms have been given target dates (2017 to 2019) by which they will have to meet efficiency parameters such as reduction in power lost through transmission, theft and faulty metering, installing smart meters and implementing GIS (geographic information system) mapping of loss making areas. States will also have to ensure that power tariffs are revised regularly.
- So far, 17 States have agreed to join the scheme. Rajasthan recently became the first state to issue UDAY bonds.
Q.1 Consider the following statements with respect to Ujwal DISCOM Assurance Yojana
- It has ambitious target of making all discoms profitable by 2018-19.
- DISCOM debt not taken over by the State shall be converted by the Banks / FIs into loans or bonds.
- Nagaland, Odisha and West Bengal are only three states that have not joined the scheme.
Choose the correct answer from the above
- 1 only
- 1 and 2 only
- 1 and 3 only
- All of the above
Answer: d.) all of the above