Dismal DISCOM (distribution company) credit profiles due to high debt, heavy losses and poor operational efficiencies affects every aspect of the Indian power sector and is directly responsible for large populations without access to power, regular power cuts and the inability to purchase power from generators.

To rectify these issues the government launched the Ujwal DISCOM Assurance Yojana (UDAY) in November 2015, a program aimed at financial turnaround and revival of electricity distribution companies in India to rework the Rs.4.3 trillion (~$64 billion) debt of utility distribution companies (DISCOM).

The program comprises of four major initiatives: improving operational efficiencies of DISCOMs, reducing the cost of power, reducing interest costs of DISCOMs, and enforcing financial discipline on DISCOMs through the alignment with state finances. By becoming UDAY signatories, state governments are to take over 75 percent of their respective DISCOM debt and pay back lenders through the sale of bonds. DISCOMs are supposed to issue bonds for the remaining 25 percent of their debt.

Twenty-two states have joined the UDAY program so far, but none of the DISCOMs have yet shown marked improvement. The deadline for joining the UDAY program has been extended to March 31, 2017. Half of the DISCOM loan transfers to respective state governments are expected to happen by this date with another 25 percent to be transferred by FY 2018. The program has the right intentions, but implementation and enforcement has been slow.

The successful implementation of the UDAY program remains vital for the financial health of DISCOMs. However, its success hinges upon participating state’s willingness and ability to adhere to key operational milestones, reducing overall costs of power by sourcing power through an optimal mix of generation sources and building adequate intrastate transmission capacity, improving sustainability of DISCOMs by moving to cost-reflective tariff regime (quarterly and monthly automatic fuel adjustment), supporting DISCOMs through timely payment of subsidies, and proactive resolution of other critical issues such as lowering cross subsidization in power tariffs to boost demand and accurate determination of aggregate technical & commercial (AT&C) losses.

OVERALL PROGRAM ACHIEVEMENTS:

Rajasthan is the only state that has reduced the Average Cost of Supply (ACS)-Average Revenue Realized (ARR) gap. The gap has decreased from Rs.1.68 (~$0.025)/kWh in FY 2015-16 to Rs.0.83 (~$0.012)/kWh during the first half of FY 2016-17 (on an input energy basis).

Among DISCOMs from the northern states of India, Haryana’s Dakshin Haryana Bijli Vitran Nigam (DHBVNL) made a profit of Rs.790 million (~$11.799 million) in the first half of FY 2017, against a loss of Rs.4.72 billion (~$70.5 million) in FY 2015-16.

In total, 15 UDAY signatories have filed a tariff petition for 2016-17.

Rajasthan, Bihar and Punjab are three participating states that have reduced their average cost of power – Rajasthan by 12.83 percent, Bihar by 12.25 percent and Punjab by 7.83 percent.

The Manipur DISCOM, MSPDCL, has installed pre-paid metering to reduce outstanding consumer debts, energy theft and improve billing efficiency. The revenue collection has gone up from Rs.886.1 million (~$13.235 million) in FY 2012-13, a monthly average of Rs.73.8 million (~$1.102 million) to Rs.1.75 billion (~$26.28 million) in FY 2015-16, almost double the monthly average to Rs.146.6 million (~$2.189 million).

As of January 27, 2017, bonds worth Rs.1,830.84 billion (~$27.346 billion) have been issued by the participating states at reduced rates of interest. Despite these achievements, the program has not been as successful as expected.

How Initial States Have Fared

The 14 states of Jharkhand, Chhattisgarh, Rajasthan, Uttar Pradesh, Gujarat, Bihar, Punjab, Jammu and Kashmir, Haryana, Uttarakhand, Goa, Karnataka, Manipur and Andhra Pradesh were the first to sign Memorandums of Understanding (MoU) under UDAY program. Of these, only four states, Gujarat, Uttarakhand, Chhattisgarh, and Maharashtra, have achieved a reduction in AT&C losses – Gujarat down to 13.64 percent from 16.15, Uttarakhand down to 33.25 percent from 35.41, Chhattisgarh down to 26.66 percent from 27.33, and Maharashtra down to 20.25 percent from 20.59, respectively during April-September, 2016.

So far, nine states have issued UDAY bonds totaling Rs.1,600 billion (~$24 billion). The interest on the bonds is putting pressure on the budgets of state governments, which in turn will negatively affect budgetary allocation for development in other areas. Keeping this in mind for the initial states to join UDAY, an expected break-even ceiling of 2020 has been established for some states, stated an official at MNRE. We cannot expect to see large-scale changes before then. States facing significant challenges, such as Uttar Pradesh, Jharkhand, Bihar, and Haryana will be able to eliminate the gap by FY 2020. However, states like Chhattisgarh and Rajasthan, where the accumulated losses are due to lack of tariff increases in line with cost escalations, are expected to witness faster turnarounds – by 2018, added the official at MNRE.

What Project Developers Are Seeing

Since solar project developers have been directly affected by poor DISCOM financials in the form of late payments and curtailment, we asked a few developers if they are seeing any signs of progress on the ground when dealing with DISCOMs.

Curtailment issues have subsided for the time being, but can always resurface. The program talks about debt restructuring, but a major part of the debt is still not addressed and there is a lack of interest to purchase bonds issued by states, commented a developer.

At least 15 states had joined UDAY initially. Out of these, DISCOMs in no more than five or six states have shown a positive turnaround. During the timeframe since the initial states joined the program, at least more than 10 states should have shown a positive decline in AT&C losses, stated another developer.

Only one out of the more than 40 DISCOMs have shown a profit since the inception of the UDAY program – that speaks volumes about the success [or lack thereof], stated another developer. “States are issuing bonds, but are they finding takers?” questioned the developer.

Although Jharkhand was one of the initial states to join, the state DISCOM is still not ready to sign power purchase agreements (PPA) for solar projects, stated another developer.

Government Officials See Slow but Steady Progress

Currently, the states of Haryana, Gujarat, Bihar, Punjab, and Rajasthan have fulfilled close to 30-45 percent of the commitments made under the UDAY program, stated a MNRE official. Eight states including, Bihar, Uttar Pradesh, Jharkhand, Chhattisgarh, Goa, Uttarakhand, Rajasthan, and Andhra Pradesh have shown a decline in distribution losses, which is a big positive, added the MNRE official.

The UDAY program is a revival plan, not just a bailout package, and it takes time to make DISCOMs robust so that they do not fall under heavy debt again. It’s not that there has been no progress. Developers want a fast rollout of packages and benefits, but they should understand the enormity of the work at hand. Progress is slow, but there is progress, stated another MNRE official.

There has been a positive reduction in cost of power in states that are more dependent on thermal power. States like Bihar and Punjab where thermal power is the mainstay, have shown a decrease in the cost of power due to cheap domestic coal and this is a result of UDAY, stated an official at North Bihar Power Distribution Company Limited (NBPDCL). Bihar joined UDAY program at the right time and we are seeing some positive changes. The program has given hope to the distribution sector in an agrarian and industrially backward state like ours, stated an official at South Bihar Power Distribution Company Limited (SBPDCL). In Bihar, we are using new billing software to help reduce AT&C losses and electricity theft is a major issue for DISCOMs in the state, added the official at NBPDCL. The state government has also issued bonds worth Rs.23.32 billion (~$348.32 million).

States like Uttar Pradesh, Bihar, and Jharkhand need to invest in the transmission and distribution network, implement feeder separation programs and improve metering, billing and collection efficiency in order to reduce AT&C losses meaningfully. All these are costly affairs, hence the pace of turnaround is sometimes slower than expected, stated an official at Uttar Pradesh Power Corporation Limited (UPPCL).

The government is strengthening the transmission network and is working towards reducing coal price. Through the electrification program the state is trying to lessen incidents of electricity theft by connecting more households to the grid, stated an official at Uttarakhand Power Corporation Limited (UPCL).

In Haryana, positive results have already been seen; DHBVNL is making a profit. The state is working to cut down AT&C losses and inclusion of large parts of the state into the National Capital Region has helped, stated an official at Haryana Electricity Regulatory Commission (HERC). Electricity is reaching new areas in the state due to better grid infrastructure which has also contributed to the state DISCOMs improved finances, added the HERC official.

Cheap coal has helped Punjab, stated an official at Punjab State Power Corporation Limited (PSPCL). In addition, payment of pending electricity bills by government departments and organizations in the state has helped, added the PSPCL official. Smart-metering is also underway in the state.

Our state has issued the largest number of bonds, both in terms of bonds issued directly by state government and by state DISCOMs, stated an official at Ajmer Vidyut Vitaran Nigam Limited. One other practice that is helping is cutting power to areas with high AT&C losses, this allows us to sell electricity to regions where payments are made timely. Payment of state government bills has helped, stated an official at Jaipur Vidyut Vitaran Nigam Limited. In Rajasthan, we have implemented 100 percent feeder and consumer metering as well as asset and consumer mapping. All of this has helped, stated an official at Jodhpur Vidyut Vitaran Nigam Limited.

Loss reduction targets at the sub-division level and distribution of responsibility amongst the government departments to achieve these loss reduction targets has helped. We have cut down AT&C losses and Gujarat DISCOMs are amongst the best in India, stated an official at Paschim Gujarat Vij Company Limited (PGVCL). Improved efficiency of thermal power projects has also helped, added the PGVCL official.

Implementation of DDUGJY program in mainly tribal Jharkhand has helped the state, said an official at Jharkhand Bijli Vitran Nigam Limited (JBVNL). The AT&C losses have been brought down to close to 40 percent, but massive grid infrastructure [overhaul] needs to be done in the state to connect more consumers to the grid and help the DISCOM generate revenue, added the JBVNL official.

We have started performance monitoring and management and the feeder improvement program for network strengthening and optimization is underway. The recently announced demonetization also helped as huge amounts of revenue was recovered through payments of unpaid power bills, stated an official at Uttar Pradesh Power Corporation Limited (UPPCL). We have also brought down intra-state transmission losses from above five percent to below five percent, which is an achievement for a state of UP’s size, added the UPPCL official.

In Goa, we are just focusing on the operational turnaround as the state had negligible DISCOM debt. Through proper monitoring, billing and collection efficiency has risen in the state, stated an official at Electricity Department of Goa.

Andhra Pradesh has implemented a smart metering program and through DDUGJY, the number of people connected to the grid has increased. The state is also focused on changing the energy supply pattern in the agricultural sector with the replacement of older pumps with more energy efficient pumps to help cut down bills and make power available for other regions. Through an increase in billing and collection efficiency, the state is witnessing a positive turnaround of its DISCOMs. Currently, both of the DISCOMs in Andhra Pradesh are amongst the best in India, behind Gujarat, said an official at Eastern Power Distribution Company of Andhra Pradesh Limited.

Though project developers and power producers are not seeing an immediate turnaround or benefits, there is confidence among state and central government officials that things are headed in the right direction. With renewable energy – especially solar – forecast to be installed in record numbers over the next five years, DISCOM financials need to get turned around sooner rather than later, without which it will become impossible to achieve India’s goal of installing 100 GW of solar and 175 GW of renewable energy by 2022,” said Raj Prabhu, CEO of Mercom Capital Group.