May 2019

Even as the power sector has been progressing and evolving, the distribution segment has continued to struggle. Despite the centre’s attempt to revive the segment through the Ujwal Discom Assurance Yojana (UDAY), discom debt and dues have been mounting. This has led to severe criticism of the scheme, which is now likely to enter its second phase.

While some discoms have managed to improve their balance sheets and P&Ls under UDAY I, many others have missed the mark. Under the scheme, discoms were expected to increase tariffs and reduce AT&C losses. However, owing to the lack of political will, they have not been able to implement major operational reforms. State regulators have, in many cases, not allowed electricity tariffs to keep pace with inputs costs. As a result, the financial condition of most of the discoms has deteriorated and their dues to power generators have been rising and currently stand at over Rs 410 billion.
The financial health of discoms has a direct impact on the renewable energy sector as they are the key offtakers of this power. The weakening of this link may have serious implications for the long-term viability and future growth prospects of renewable energy capacity in the country.

It will, therefore, be critical to evaluate the progress of UDAY I before designing the next phase of the scheme. UDAY II, if implemented, should be geared towards improving the operational performance of the utilities and introducing structural changes in the segment.

UDAY II should also factor in the growing share of renewables in the power mix and their increasing cost competitiveness. This has created a two-fold complication for discoms. Large consumers have moved to open access or captive generation, jeopardising the traditional cross-subsidy model of discoms. Meanwhile, the discoms are locked into costly long-term power purchase agreements with legacy generators. A way out of this situation is to ensure that large consumers get into long-term open access contracts. This will enable discoms to plan their power purchases more accurately. They should, moreover, stick to short-term contracts and enhance their offtake of cheaper renewable power.

Above all, tracking key parameters in the sector on a periodic basis to provide a clear picture of discom health is critical. This will give early warning signs before issues balloon to unmanageable levels.

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