The power ministry is planning to start a second version of UDAY, aimed only at reducing the losses of discoms and improving the quality of power supply.
The Centre’s efforts to turn around State-owned power distribution companies (discoms) might falter, affecting the finances of state governments.
The Ujwal Discom Assurance Yojana (UDAY), launched in 2015, will conclude by the end of this fiscal year, leaving discoms in the red and the finances of state governments in trouble.
The rising cost of power, along with increased power demand due to electrification schemes, has increased the expenditure of discoms.
At the same time, minimal tariff hikes in the past four years have come in the way of improving their turnover.
The cumulative losses of discoms (21 states) stood at Rs 28,369 crore at the end of FY19, up by 88 per cent over a year before.
A recent RBI report on state finances said: 'Post the implementation of UDAY, state debt witnessed a significant rise in 2015-16 and 2016-17 and continued in 2017-18 albeit at a relatively (low) rate despite ceasing of UDAY.'
The RBI’s report took a serious note of UDAY and is of the view that the debt position of state governments has started showing incipient signs of unsustainability, 'particularly post UDAY'.
UDAY was launched to improve the financials and operations of loss-making State-owned discoms.
The financial part included states taking over 75 per cent of the losses of discoms and issuing bonds against them. The discoms also issued sovereign-guaranteed bonds against the remaining 25 per cent.
With cleaner balance sheets, the discoms were mandated to fix their aggregate technical and commercial (AT&C) losses, improve the quality of power supply, reduce power theft, and bridge the cost-revenue gap.
The RBI and the central government have acknowledged that UDAY has not been able to achieve its objectives.
Union Finance Minister Nirmala Sitharaman in her Budget speech this year said “UDAY needs to be reviewed”.
Union Minister of Power R K Singh recently said in a letter to three states that the performance of discoms under UDAY, rather than improving, had worsened.
The RBI has gone further to warn states and highlighted for the first time the adverse impact of financial restructuring done by the states for the discoms. 'The impact on state finances is likely to continue much beyond the terminal year due to interest payment on UDAY bonds and redemption of these bonds,' it said in its latest report.
States including Rajasthan, Uttar Pradesh, and Telangana have used State-sponsored schemes to restructure the debt of their discoms.
Official sources said Rajasthan had converted the losses into regulatory assets to show their discoms to be profitable and avoid an increase in power tariffs.
Rajasthan showed a profit (including subsidy) of Rs 1,200 crore in the last fiscal year.
Regulatory assets are discom expenses that are recoverable through power tariff hikes but State Electricity Regulatory Commissions do not take them into consideration while calculating current electricity tariffs.
According to an estimate by the ministry of power, discoms lose Rs 22,000 crore annually due to the creation of regulatory assets.
While discoms are improving their operations with schemes, rising dues might halt the progress. Cumulatively discoms owe more than Rs 70,000 crore to conventional power-generating companies and around Rs 9,000 crore to renewable power projects. At the same time, the average cost of power procurement has increased to Rs 4.42 per unit.
The ministry in its latest report said this was owing to increases in coal prices and freight rated of the railways.
To address these issues, the ministry is planning to start a second version of UDAY, aimed only at reducing the losses of discoms and improving the quality of power supply.
The Centre has also given deadline to the states to conclude all power infrastructure schemes by end of this fiscal year.
Officials believe that there will be gradual improvement in the financials of discoms.
"None of the states have breached their FRBM limit so it's a positive sign. With all electrification schemes coming to a close, the discoms will see their financials and operations improving, going forward," he said.