Insights into Editorial: Beyond UDAY Scheme + Mindmaps on Issues
09 November 2015
The government of India recently unveiled its Ujwal DISCOM Assurance Yojana (UDAY). UDAY provides for the financial turnaround and revival of Power Distribution companies (DISCOMs), and importantly also ensures a sustainable permanent solution to the financial mess that the power distribution is in. Years of losses, subsidies and low tariffs have financially crippled the DISCOMs.
Why DISCOMs have accumulated huge losses?
There are three chief reasons for the accumulation of the liability:
- Tariff hikes not keeping pace with the rise in costs.
- Transmission losses.
How UDAY attempts to improve the situation?
- UDAY attempts to buffer the finances of the distribution companies, or discoms, from the subsidies that state governments may want to provide for power. This is done by asking states to issue bonds to banks as repayment for discom dues. The states will now have to directly bear on their budgets the entire cost of the subsidies.
- It attempts to enforce discipline on States as it requires them to absorb a part of future losses of the discoms.
What else can be done to improve the financial health of discoms?
- One way is to ask the consumer to pay full price, as determined by state regulators and later on the state governments can directly transfer subsidy payments to the consumer. This way, discoms’ financial health is protected and the subsidy becomes an explicit contract between the government and the beneficiary.
- Another way is to build the subsidy into the tariffs and have an annual budgetary provision for subsidies, which is transferred to discoms at periodic intervals.
What happens if UDAY is successfully implemented?
The financial picture of DISCOMs can be significantly improved and DISCOMs can buy enough power to meet aggregate demand in their domains.
What is left out of UDAY?
UDAY is silent on improving the operational efficiencies.
Following ways can be adopted to improve the operational efficiencies:
- Smart metering.
- Upgrading of transformers.
- Separating agricultural connections at the transformer level.
- Use of efficient LED bulbs, agricultural pumps, fans & air-conditioners
What made centre’s intervention necessary?
- DISCOMs have accumulated losses of approximately Rs. 3.8 lakh crore and outstanding debt of approximately Rs. 4.3 lakh crore. Financially stressed DISCOMs are not able to supply adequate power at affordable rates, which hampers quality of life and overall economic growth and development.
- Efforts towards 100% village electrification, 24X7 power supply and clean energy cannot be achieved without performing DISCOMs.
- Power outages also adversely affect national priorities like “Make in India” and “Digital India”.
- Default on bank loans by financially stressed DISCOMs has the potential to seriously impact the banking sector and the economy at large.
Significance of UDAY:
- It is seen as a path breaking reform for realizing Prime Minister’s vision of affordable and accessible 24×7 Power for All.
- It is also a shining example of the utilization of the best principles of cooperative and competitive federalism.
- UDAY also accelerates the process of reform across the entire power sector and will ensure that power is accessible, affordable and available for all.
- Rating agency Crisil believes that by fiscal 2018, UDAY can potentially reduce the power companies’ losses by 50%.
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