How UDAY scheme will drive the coal power sector and in turn coal demand? - Feedback

Indian power sector has undergone a huge transformation in the past 7 -8 years – be it generation and transmission capacity addition or bringing renewable at the centre of power sector development or taking electricity to the remotest corner of the country. Private sector participation in the power sector has resulted into record capacity addition year after year. Govt. has announced a number of policy initiatives to boost the investment in the sector. Basic infrastructure has been laid to improve per capita electricity demand of the country which is currently mere one third of the world average. However, all these initiatives have not resulted into higher electricity demand which is showing almost a flat curve since last 3 – 4 years. Our peak load deficit has drastically gone down from around 10% to 2% in these years.

A simple analysis will say that country’s electricity generation has outpaced its electricity demand. But is that the real picture when majority of the 1.3 billion population of a country does not get sufficient electricity to meet their basic needs? The centre of this large crisis is our beleaguered DISCOM sector which was suffering a loss of approx. Rs. 60,000 Cr. In each financial year and have accumulated losses of approximately 3.8 lakh crores and outstanding debt of Rs 4.30 lakh crores. The sector has already been bailed out once in the past however the lessons have not been learnt well. There are five key reasons why our electricity distribution sector went to this stage. These are –

  1. High AT&C loss which the DISCOMs are unable to pass on to the customers
  2. High Tariff Gap – Long pending tariff hike in the state where the domestic and agriculture customer mix is high
  3. Unrealistic tariff hike in the bulk consumer segment forcing them to opt for open access – Industrial power tariff is 35% more compared to industrial tariff globally
  4. Rising interest cost burden due to accumulated debt – DISCOMs have accumulated debt of INR 4300 billion and losses of INR 3,600 billion
  5. Inefficient billing and collection – Billing and collection efficiency as low as 41% in certain North Eastern states

The electricity requirement reported by CEA is not the true requirement of the country but the amount of electricity that DISCOMs can procure. Above factors have made DISCOMs reeling under huge financial stress and as a result their electricity procurements have been stagnant in recent times. Every additional unit of costly electricity they buy, they go into higher financial loss. This has kept our country’s electricity demand at an artificial low level and has impacted almost all the stakeholders in the value chain. Bank’s NPAs have increased significantly. IPPs which were once the key growth engine of the sector were unable to sign PPAs for many of their capacities which has affected their ROI. More merchant plant has resulted into very low electricity price at the exchange which is also affecting the financials of the generation companies. DISCOMs were unable to pay dues of the generation companies which has hit their financials as well. Overall, this has transpired to a very negative and bleak picture for investment into the power sector. Hence, revival of the DISCOMs was very much necessary to bring the sector back into the growth trajectory.

This is the genesis of Ujjwal Discom Assurance Yojana or more popularly known as ‘UDAY’. The scheme was necessary for much needed revival of the DISCOMs thereby helping other stakeholders in the value chain. The scheme’s focus on improving efficiency throughout the entire process on a sustained basis will ensure DISCOMs become profitable in the future. Under the scheme, state governments, which own the DISCOMs, can take over 75 percent of their debt as on September 30, 2015 and pay back lenders by selling bonds. For the remaining 25 percent, DISCOMs will issue bonds. The central government will ease rules to allow the states participating in the scheme to borrow more and help with the additional burden.

The rescue plan has the potential to provide a permanent resolution of past as well as potential future issues of the sector and empowers the utilities to break even in next 2-3 years. There are primarily four initiatives – improving operational efficiencies of DISCOMs, reduction of cost of power, reduction in interest cost of DISCOMs and enforcing financial discipline on DISCOMs through alignment with state finances. Operational efficiency improvements are proposed to be brought in by compulsory smart metering, upgradation of transformers and meters to reduce electricity lost during transmission and distribution (or theft) from around 22 percent to 15 percent by 2018-19. By the same year, the gap between average revenue realized (also known as tariff) and average cost of supply (or cost at which electricity is procured) will also be eliminated. Present power minister of the country, Shri Piyush Goyal mentioned that the scheme will eventually lead to a saving of Rs 1.8 lakh crore annually.

This is a landmark reform for the electricity distribution sector and will enable DISCOMs to buy more power in the future to unlock the true electricity demand of the country. We feel there are two reasons why this will give boost to coal based power generation and in turn coal demand –

  1. Higher base load demand – With financial restructuring and reduction in AT&C loss, DISCOMs will have better cost economics in place to buy more power to meet the growing electricity demand in their operating region. We feel this will lead to a massive growth in base load demand throughout the country. There are options available but coal based power is the most economical option to meet this higher base load demand which will give a boost to coal based power generation in the coming years
  2. Focus on reduction of power procurement cost – We believe frequent tariff hike is not a realistic solution and hence States and DISCOMs will try to restructure their energy mix to reduce the power procurement cost. This will minimize the gap between average revenue realized and average cost of power supply. Many states are already asking for wavering of their RPOs and will resort to more economical coal based power generation to keep their finance in check. This would definitely drive coal based power generation in the country

Coal sector reform has already been done. Domestic coal is now available in abundance hence our dependence on imported coal would likely to go down in future which will in turn reduce the power generation cost and will help each and every stakeholder in the value chain.

About Rudranil Roysharma

Leave a Reply

Your email address will not be published. Required fields are marked *