Though Tamil Nadu, the latest state to sign on to the UDAY discom revival package, is confident of being able to break even in FY18 without increasing tariffs, the performance of most signatory states is disappointing. According to an analysis by Motilal Oswal, based on data for 12 states in H1FY17 on the power ministry’s UDAY website, ATC losses have widened for 10 of the 12 states—ATC losses, by and large, are the fulcrum of the UDAY package since, if these fall fast enough, even without a significant hike in electricity tariffs, state electricity boards (SEBs) can start breaking even; at an aggregate level, ATC losses were projected to fall over 3 percentage point every year to reach 15% by FY19 from the current level of 22% . While it is early days yet, as Motilal points out, the gap between the cost of supply and the revenues earned has increased in seven states and could go up even more with the increase in cess and Railway freight on coal (the two would add 15-20 paise per unit of power).
In the case of Gujarat, from an already low 14.9%, ATC losses fell further to 13.7% (the target was 14%) and, as a result, the SEB generated a profit of 94 paise per unit of power as compared to the baseline of 3 paise and the target of 2 paise. Things were hardly as rosy in other states—for Uttar Pradesh, one of the biggest loss-making states, the data is not even available on the UDAY website, presumably due to the poor progress in achieving targets. In the case of Rajasthan, the state has more or less achieved its ATC target of 28.26%—it achieved 28.79%—but the gap between costs and revenues was as high as 83 paise as compared to the target of 35 paise. Punjab’s gap rose from the baseline of 60 paise to R1.05 per unit while the target was 37 paise.
All of which means the states will need to do a lot more to achieve their goal of financial stability. In the case of Rajasthan, for instance, to use Motilal’s term, Uday’ing the gencos will be important—once NTPC acquires the state’s Chhabra power plant, financing costs will reduce considerably and this will reduce fixed costs from R1.64 per unit to R1.39. A larger challenge for all states is that, with demand slowing down in most states and new capacity coming up, the gap between costs and revenues will only increase. While renewable energy obligations are important from the point of view of the environment, they represent a higher cost for SEBs, a cost that can be prohibitive when, in any case, the utilities have a lot of catching up to do in terms of tariff. While the onus of this lies on the states since, over a period of time, SEB losses will have to be taken onto their books, PSU banks—and RBI—need to be careful to ensure that they don’t end up financing bankrupt SEBs all over again; had banks not been so willing to lend in the past (possibly due to political pressure as well), SEBs would never been able to build up the kind of debt they have.