Government Systems and the Policy Process

Project Report on

Ujwal Discom Assurance Yojana (UDAY)

Submitted to

Instructor: Prof.
Academic Associate: Ms. Nandini Singh

Section A, Group 11

Aashutosh Saini
Sumiran Bhatia
Soumyadeep Ghosh
Krutika Kharat
Jainesh Doshi
Sandeep Nongkynrih

On
24th February 2018
Contents

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Introduction
Around 30 crore people in the India still do not have access to electricity. This means that the
third largest producer of electricity in the world is still not able to bring light in the life of one
fourth of its population.

Over the past few years, the Indian power sector has witnessed an unprecedented turnaround.
The total power capacity has increased by nearly one third in the last three years. The
government’s immediate goal is to electrify all villages by May 1, 2018, which would further
require doubling of the current production capacity.

However, the weakest link in the entire chain of power sector reforms is distribution which
involves the state distribution entities (Discoms). In the financial year 2014-15, losses of Rs 3.8
lakh crore and outstanding debt of about Rs 4.3 lakh crore was reported by them. Trapped in a
vicious cycle wherein operational losses were being funded by debt, the government launched
Ujwal Discom Assurance Yojana (UDAY) in November 2015 to revive the country’s ailing state
power distribution utilities.

Primarily aimed at making discoms financially healthy, the scheme also envisaged to have a
permanent solution to issues like cost of power, interest burden on Discoms, lack of capital and
technological equipments, etc. Under this, the state governments are required to take up to 75%
of debt from their respective Discoms by issuing sovereign bonds to pay back the lenders. The
remaining 25% of debt is to be issued by discoms in the form of bonds.

Having suffered huge losses, these were increasingly being funded by debt, leading to huge rise
of the debt component as well as the interest cost for Discoms. Moreover, since these state
discoms have a relatively weak credit history, the rate of borrowing charged to them, ranging
from 12-15% is substantially higher than that of state borrowings which hovers around 8%. All
this, along with lower tariffs, increased aggregate technical and commercial (AT&C) losses and
operational inefficiencies has significantly reduced the finances of the discoms.

The technical losses are mainly due to overburdening of the present line, inefficient maintenance
of equipment, etc while inefficient metering, billing, collection and loss by theft contribute to the
commercial loss.

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Uday aims at bringing these persistently high AT&C losses to 15%, which seems difficult
specially for certain states like bihar and J&K where these losses are more than 30%.

Any such loss reductions would have a direct impact on the state discoms as well as the
consumers. As the financial health of the discoms will improve they will be in a better position to
utilize their limited resources towards other economically beneficial activities and avoid any
unreasoned tariff hikes.

Uday as a policy works on the complete revival of the power distribution sector, unlike the
earlier attempts like the Financial Restructuring Plan and One Time Settlement (OTS) scheme.
Uday aims for not only a financial revival of the highly indebted Discoms but also recovery of
the power distribution system as a whole, while the latter schemes focused majorly on managing
the liabilities of Discoms. UDAY focuses on both cost efficiencies by reduction in interest
burden, operational cost and losses as well as revenue efficiencies through strict discipline in
metering, billing and collection and periodic tariff increase to adjust the increase in fuel prices.

It is anticipated that the envisioned improvement in the efficiency of operations of discoms as

well as the taking over of debt for the UDAY adopting states is going to result in a more efficient
collection and billing mechanism, with reduced losses. Also the bonds issued under UDAY and
the refinancing would occur at significantly lower rate of interests, thus leading to substantial
savings on the interest cost. Moreover, under the UDAY scheme the fuel linkages and coal prices
are to be rationalized, which would help in further reducing the fuel cost of these power
generators. All this will ultimately lead to reduction in the power purchase cost.

The major stakeholders of UDAY are the state and central governments, the DISCOMs, banks
and investors, and end consumers and industry. As per the scheme, a tripartite Memorandum of
Understanding (MoU) has to be signed between the DISCOMs, States and the Ministry of Power
(MoP), Government of India which clearly defines the targets and responsibilities of all the
parties involved. The targets of the MoU are to be reviewed by the MoP on a monthly basis.

STATE

The state governments play a pivotal role in the successful implementation of UDAY. As part of
the scheme, the major role to be played by the state involves taking over 75% of the DISCOM
debts as on 30th September 2015 through non-SLR bond issue and transfer of funds through
equity, grants and loans to the DISCOMs. The state also has to provide a guarantee for
refinancing the remaining 25% debt of the DISCOMs.

In 2016-17 the RBI stated that due to the significant increase in capital outlay and loans and
advances to power projects, the GFD-GDP ratio stood at 3.6 percent, crossing the threshold of 3
percent for the first time in over 10 years.

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DISCOMS

Due to their relatively weak credit profiles, DISCOMs can borrow at interest rates ranging
between 12% and 15% in contrast to the State’s borrowing rate of 8%. These huge interest
expenses weaken the finances of the DISCOMs which, coupled with depressed tariffs, high
AT&C losses and low efficiencies, force them to consistently report operational losses. UDAY
aims at coming to an understanding between the state and the DISCOMs wherein the states
alleviate the financial burden on the DISCOMs allowing them more space to deal with their
other operational issues. The DISCOMs seeking the benefits of the scheme are expected to meet
the following targets:

 Achieving a reduction in AT&C losses by FY19 to 15% for high loss making states and to 10%
for lower loss making states as per the trajectory provided in each of the MOUs
 Elimination of ACS-ARR gap as per a detailed action plan to be submitted by the DISCOMs
 Compulsory metering of energy feeders and distribution transformers to track losses at feeder
and transformer level in order to take the necessary corrective actions
 Consumer indexing and GIS mapping of losses to identify loss making areas and take necessary
corrective actions
 Effective demand side management through distribution of energy efficient equipment such as
LED bulbs, agricultural pumps, etc.

BANKS AND INVESTORS

The investments made out to the DISCOMs are fraught with risk due to their consistent
operational losses and low operational efficiency. The transfer of debt from the DISCOMs to the
state mitigate some of these risks by:

 Avoiding banking contagion which might create significant non-performing assets

 Lowering capital adequacy
 Revival of existing power projects suffering from low PLs due to increased procurement of
power by the DISCOMs
 Reducing investment uncertainty across the sectors

END CONSUMER AND INDUSTRY

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The ultimate goal of the scheme is to provide a reliable, uninterrupted and economical power
distribution system to end consumers and industries. The major benefits of the scheme include:

 Improved quality of life due to 24x7 availability of power

 Lower cost of power due to reduced fixed costs per unit as a result of power generations plants
running at higher PLFs to meet increased power demand of DISCOMs

On doing a basic online search, we learnt that there were four DISCOM’s in Gujarat.

 Dakshin Gujarat Vij Company Limited

 Madhya Gujarat Vij Company Limited
 Paschim Gujarat Vij Company Limited
 Uttar Gujarat Vij Company Limited

The one that operated out of Ahmedabad was UGVCL. We headed to their office in Chandkheda and
spoke to Mr. Makwana who was the technical head of the facility. He gave us a rough idea of the working
of the DISCOM, but said that UDAY scheme didn’t feature in his domain of working. He directed us to
Mrs. Alpa who heads the Sabarmati circle division of UGVCL. We took an appointment to talk to Mrs
Alpa who explained that UDAY scheme and its effect will be best explained to us by the head office at
Mehsana. We then spoke to Mr. BC Patel who told us that certain scheme related data was confidential
and had orders from the Chief Engineer to not disclose it to curious students, analysts, journalists etc.
However, he was helpful enough to redirect us to a junior engineer Mr. Patel who explained in great
detail the impact and working of the scheme.

CHALLENGES

The major challenges that pose a hurdle to the successful implementation of the scheme include:

 High cost of purchasing power

 Persistence of low billing and collection efficiencies
 Flat rate billing of unmetered consumers disincentivizing efficient energy utilization
 Difficulty in collection, management and reconciliation of data across DISCOMs

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He mentioned that under the scheme, all the DISCOMs got early targets with respect to % of metered
feeders – urban and rural, sale of Ujala(energy saving LEDs) bulbs, Agricultural pumps, electricity access
to un-connected households etc. Bulbs and pumps distribution was part of DSM – demand side
management. They also looked after EESL – energy efficient services limited. He then took us through
the dashboard on the uday website. He explained the meaning of the graphs and the significant of the
numbers. He also mentioned about the state-wise MOUs present on the website. He took great pride in
detailing that given the standardized nature of targets for all states, most of them were already achieved
by Gujarat. For eg: Gujarat was the first state to electrify all its villages under the Jyotigram Yojna in
2006. So the 100% electricity access target under the UDAY scheme wasn’t much of a burden for the
DISCOMs. Also, the % of metered feeder machines target of 100% was something that they could easily
maintain because all of their old feeder machines were already metered and the new ones were sold with a
built in meter.

He mentioned that the sale of LEDs helped the people save a lot of money on electricity bills and help
improve their standard of living.

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According to the National Ujala Dashboard 3,89,33,582 LEDs were distributed as on 21 st Feb

2018. 50,56,187 MWh of energy was saved year resulting in a cost saving of 2,022 crores.

References

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https://currentaffairs.gktoday.in/tags/uday-scheme

http://pib.nic.in/newsite/PrintRelease.aspx?relid=161811

https://www.ibef.org/industry/power-sector-india.aspx

https://economictimes.indiatimes.com/-how-uday-is-going-to-help-transform-indias-power-
distribution-system/articleshow/55049964.cms

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