1. From cheaper power to higher availability, mark out UDAY but operational improvement still to come

From cheaper power to higher availability, mark out UDAY but operational improvement still to come

UDAY has improved discom balance sheets while ensuring cheaper power and higher availability, but operational improvement still has a long way to go.

By: | Published: May 18, 2017 5:59 AM
My article “Fixing Discom’s Finances” on July 9, 2015, suggested a way forward for commercial viability.

My article “Fixing Discom’s Finances” on July 9, 2015, suggested a way forward for commercial viability. Subsequently, the government introduced a comprehensive program UDAY in November 2015. The scheme comprises three parts; (i) financial re-engineering of debt of Rs 4.3 lakh crore; (ii) provisioning of cheap power through the higher availability of coal/swapping of coal, etc, and higher funding towards DDUJY/IPDS schemes, (iii) operational improvement by discoms for sustainability. The scheme envisaged that 75% of the debt shall be taken over by the state, of which 50% will be in the first year and the remaining in the second. Although this has improved discom balance sheets and has lowered interest rate by 3-4%, while ensuring cheaper power and higher availability, operational improvement still has a long way to go.

While 27 states/UTs have signed UDAY, analysis has been limited to top-10 states which consume more than 70% of the total energy. Of 26 discoms involved in the 10 states, three in Gujarat have retained highest (A+) category. There has been an improvement in eight(one each in Rajasthan, MP, TN, Maharashtra, UP, Gujarat, two in AP), 12 have maintained status quo (Punjab, all four in Karnataka, two in Rajasthan, three in UP, one in Telangana & one in MP). But three (one each in MP, Telangana & UP) have slipped from their earlier rating.

Thus, an analysis of rating shows that there has been no improvement in six States comprising 15 discoms (catering to 50% energy). Thus, issues need to be addressed without further loss of time to have a turnaround of discoms in the shortest possible time Consumer metering, billing and collection efficiencies continue to be dismal, particularly in Rajasthan, UP & MP, where AT&C losses have increased in FY16 even reaching 45% in some cases. Billing efficiency of certain discoms is as low as 68%. Thus, technology needs to be implemented to enhance the efficacy of billing and collection.

Cost coverage ratios, which basically indicate the cash flow situation of a discom, are as low as 70% leading to 30% revenues remaining unrealised even after accounting for subsidies. Moreover, despite power being available for Rs 2.50-Rs 3.00, average procurement price for some has been `4.50 per unit. Distribution system operation and specialised power procurement group do not exist in many discoms. This shall become more critical with higher penetration of renewable energy in future.

Also, technology penetration is low in distribution segment. State of the art control centre for switching, control, operation and automatic fault detection and rectification are absent. Many of the discoms have negative net worth and accounts are not prepared on time. This results in poor credit rating; thus, borrowing is difficult as well as borrowing costs are high. This creates a utility spiral and it is difficult to come out of it. Methodology needs to be worked out in a time bound manner to make them solvent.

The average subsidy is over 12 % of revenue for discoms. For instance, in Gujarat, the subsidy has increased from Rs 727 crore from March 2010 to Rs 4,664 crore in March 2016. An absence of disbursement from states would seriously affect the operation/cash flow as power procurement costs are as high as 75-80% of the electricity cost. That’s why many discoms prefer long-term purchase on deferred payment basis, even though it is costlier than short-term payments which require payments in advance. The success of direct money transfer schemes in other sectors needs to be replicated in electricity at the earliest to improve the cash flow.

The most crucial factor for the success of the distribution system lies with an effective regulatory mechanism. Although it has been more than a year since its implementation, but the operational improvement has not been commensurate with the requirement. Financial re-engineering shall ease out the operation of discoms for some time, thus, time is running out to capture this advantage to a sustainable position.

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